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Forex Analysis & Reviews: The Fed is likely to smoothly lower rates (We expect a continuation of the local fall of the GBP/USD and AUD/USD pairs)
time 29.07.2019 11:00 AM
time Relevance up to, 31.07.2019 08:36 AM

The main event of the upcoming week will undoubtedly be the final decision of the Fed on monetary policy. Earlier last week, we paid more attention to this really important event and we want to sum up some results today.

What should be expected from the American regulator and how it will affect the financial markets?

In our opinion, the Federal Reserve will decide to lower the key interest rate by 0.25% for the first time in the past 10 and a half years following a two-day meeting this Wednesday. Exactly why should we expect such a decrease in the cost of borrowing?

The main reason is that the American economy is generally too early to talk about a full-scale slowdown in the economy, although it has begun to show signals indicating negative trends. Yes, there is a decrease in the number of production indicators and inflation is still below the benchmark of 2.0%. According to data released last week, the economy fell to 2.1% compared to the value of the first quarter of 3.1%. But, we should also keep in mind that the labor market is still quite strong. After the failure in May and June, the American economy received a significantly larger number of new jobs. Moreover, unlike the business activity in the manufacturing sector, the services sector feels positive. In General, we can say that really negative signals are present against the background of the trade conflict between Washington and Beijing but are not decisive.

For this reason, as we see it, the Fed will decide to lower the key interest rate not by 0.50% and recently, investors assumed to be 0.25%. Observing the dynamics of the economy, it is likely that the regulator will do it as smoothly as it has raised them since 2015 when J. Yellen was at the helm of the Fed. That is, in the condition that it continues to make decisions about lowering interest rates.

This scenario will support the demand for US assets and not allowing them to fall in price. At the same time, the US dollar is unlikely to actively decline against major currencies. This may be due to the fact that other world central banks will also follow the Fed and the ECB to lower interest rates, wanting to compensate for the gap in interest rates that is unprofitable for their national economies.

Forecast of the day:

The GBP/USD pair is trading below 1.2385. After taking office, Prime Minister Boris Johnson increased the risk of Britain leaving the EU without an agreement. On this wave of the uncertainty of consequences for the British economy, the pair may continue to fall to 1.2300.

The AUD/USD pair is trading below 0.6920. She still has the prospect of a local decline to 0.6965 on the wave of the continuing likelihood of lower interest rates for the RBA in the near foreseeable future.

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Pati Gani,
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