Federal Reserve Signals Rate Cut for 2020

The highly anticipated Federal Reserve meeting resulted in forward guidance for a rate cut, however, not as the markets were expecting.

Finance

Last updated on July 2nd, 2019 at 03:12 pm

Two Rate Cuts Priced In, Only One Expected

And that too, next year. The futures markets were looking for two cuts by the last meeting of the year. The Federal Reserve did indeed take a more dovish stance, however, they only intend to cut once. And that cut will be next year.

The big shift in the statement was that policymakers expressed increased uncertainties regarding the outlook and saw muted inflation expectations. They also added – “will act as appropriate to sustain the expansion”.

This is the same rhetoric from Powell speech earlier this month. The statement reinforces that they are certainly considering cutting rates. The market reaction has been to sell the dollar, buy gold, and equities have gotten a little bit of a lift.

Equities and Gold Continue to Carry a Positive Correlation

The rally in equities is not all that strong, perhaps this has to do with the S&P 500 hovering near all-time highs. Nevertheless, it is interesting how the positive correlation has remained with the equity index and the price of gold.

Gold has been battling resistance at $1350 all week. It was last seen trading at $1352 after hitting a high of $1356. While it is encouraging for bulls that the yellow metal is above the major $1350 level, there is not enough confirmation of a break.

Such confirmation will come if the precious metal is able to sustain current levels on a daily basis, or at least on a 4-hour chart. Now that the Fed meeting is out of the way, a catalyst might be lacking for such a move. The economic calendar remains light for the remainder of the week, although the Bank of England will meet tomorrow. The BoE is the only major central bank that is considering raising rates.

This is attributed to high inflation levels when compared to other major economies. UK data released today showed inflation rose higher than expected on an annual basis for both the headline and core consumer price index. Sterling rose against the dollar following the release and has wiped out a significant portion of recent losses.

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