6th November 2019 - Re-evaluation of the interest rate outlook in US

Walid Salah Eldin

Master Trader
Feb 15, 2016
The gold came under selling pressure, as The trade war de-escalation optimism and the improving of US service sector could spark re-evaluation of the interest rate outlook in US.

While the investors' risk appetite remains boosted by the upbeating earning season in US and the relief of signing a phase 1 trade deal between US and China soon containing what the 2 sides could reach until now in spite of having no agreed where yet to sign this deal!

The worries about spilling the manufacturing sector weakness over the service sector eased down considerably yesterday following the release of Oct non-manufacturing ISM which has shown rising to 54.7, while the consensus was referring to 53.5, after slide in September to 52.6 reaching the lowest level since August 2016.

UST yields curves have been all boosted, as the speculations of having no further interest cuts this year rose significantly, as the economy looks in less sake of further stimulations from the FOMC, after it had already done in the previous 3 meetings of its members.

Actually, The Fed seemed really reluctant to send a signal about easing again in December refraining from hinting that further accommodation is needed to be satisfied by just telling that The Fed is committed to supporting the economy.

Fed Chair Jerome Powell messages during the press conference following the FOMC meeting were also mixed, as he said that only a "material reassessment" to the outlook will change the Fed's path of interest rates and in the same time he said also that only a significant rise in inflation would trigger a rate hike.

Fed Chair Jerome Powell has said too that manufacturing and investment are falling, but the consumer-facing companies are reporting that shoppers are doing well and the consuming sector remains unaffected by any slowdown elsewhere.

The FOMC recent projections which have been released following the members meeting last September have shown also that only 7 of 17 officials saw the need for further 0.25% cut by this yearend "and that has happened by the end of October", While there were no members' forecasts for more than one rate cut this year.

The greenback became more attractive by the rising speculations of having no further cuts this year, while the some speculations reached that there could be no more cuts in the current “mid-term policy adjustment”.

As what The Federal Reserve Chairman Jerome Powell mentioned following last July 31 meeting first cut since 2008, when he warned against expecting long U.S. monetary easing cycle naming that cut “mid-term policy adjustment”, before saying following last Sep. 18 cut "it was insurance against ongoing risks".

The gold has been in balance trading near $1500 per ounce, as the monetary easing tendency was offsetting the desire of loading more risky assets as the Trade tension between US and China is easing down.

There was no odds of tightening in the foreseeable future at all and the easing was running on with no sign of halting yet, But now most of the investors are downplaying the odds of having further cuts at least soon in US.

The trade war fear is at its minimal level with also the fear of hard Brexit with no deal, after extending article 50 working to the end of next January and that what Powell said exactly after cutting the interest rate last week concerning the global economy that "uncertainty is lower following Phase One of the trade deal and the significant drop in the chances of a no-deal Brexit".

UST 10yr yield is now near 1.84% after diving to 1.6684% following the release of US labor report of October last Friday, While gold is trading close to $1485 per ounce, after reaching $1515.96 per ounce following this same figure.

EURUSD is now trading near 1.1070, while the markets seem getting ready for more dovish comments from the new ECB president Christine Lagarde to pave the way for further easing actions to raise up the inflation levels and support the current fragile tilting to the downside EU economy which is in need for adopting fiscal reflation plans, as the previous ECB president Mario Draghi indicated, before leaving his Office.

GBPUSD retreated also to 1.2858, before stabilizing near 1.2880 during the Asian session, while the markets will be watching next BOE's decision eyeing on new info about BOE's Chief Mark Carney future as his term ending will be at the end of January too by God's will.

Despite the current lower odds of leaving EU with no deal, BOE's Chief Mark Carney may repeat again his warning about The hard Brexit threat and its impact on the banking and financial sectors.

As UK is set to suffer longer from low certainty about its political and economical undermining confidence in business spending till the end of next January, amid the current global economic slowdown because of the trade war worries which are weighing down on the economic activity in UK as many other industrial countries as it can lead to much lower Yuan exchange rate hurting their exports.

MPC is expected to leave the benchmark interest rates unchanged at 0.75% holding unchanged BOE’s APF at Stg435b keeping its re-investing cash flows associated with the redemption of the gilt held on the Asset Purchase Facility.

Kind Regards

Global Market Strategist of FX-Recommends

Walid Salah El Din