Michael Kopanakis,  Head of brokerage at SquaredDirect
Michael Kopanakis, Head of brokerage at SquaredDirect

US FED cuts rates & maintains strength to wind Up 2019

Q4 has now officially began in the wake of a new Fed rate cut. In the previous article, we were leading up to the FED’s September rate decision. The FED rate currently stands at 2.00%, although the recent manufacturing data coming out of the USA shows a lack of growth missing its expectations; the figures released for September are the lowest in the past decade. 

First Published: e-Forex Magazine 89 / Currency Clips / October 2019

Q4 has now officially began in the wake of a new Fed rate cut. In the previous article, we were leading up to the FED’s September rate decision. The FED rate currently stands at 2.00%, although the recent manufacturing data coming out of the USA shows a lack of growth missing its expectations; the figures released for September are the lowest in the past decade. 

Therefore, the main question is whether we are likely to see another rate cut of around 25 basis points on the 30th of October. This would take the US overnight lending rate down to 1.75% and would be an attempt to stimulate growth in the US economy, avoiding the potential risk of sliding into a recession. This potential cut would be the 3rd rate cut in the same year. Before the past duo of rate cuts, the FED did not tamper with the rates for 11 years.

In theory, the decrease of the interest rates should, in most cases, devalue the currency which in turn would cause the EUR/USD pair to rise.  However, this has not been the case for the previous two rate cuts as we have witnessed. The public may be in fear of a possible recession as the cause for the FED to cut rates and this fear could lead consumers to be more reluctant to let go of the greenback so easily which could allow it  to maintain its strength.

Currency Clips
 

Moving from the US to the not so far east, the UK and the European Union are now in the final month of a Brexit countdown, with the UK set to leave on the 31st of October 2019. The UK may try to request an extension from the European Parliament to provide time for further negotiations with the EU if there is no agreement by the October 31st and the UK decides not to leave without a deal in place. The levels of uncertainty are now out of the comfort zone and shall continue to cause volatility in the Euro until the whole Brexit situation is finalized, as well as during the period after Brexit when the true effects of the UK’s departure from the EU will be observed in practice and not only in theory. 

Back to the ongoing trade war between the US and China. The two global giant economies are set to continue trade talks this month and one thing is for certain: the outcome of these trade talks will have an affect on the EUR/USD pair because the more the two nations disagree on the trade agreement, the longer the greenback will remain volatile.

Despite the FED’s decision to cut the Interest rate, the EUR/USD pair continued to follow the previous downward channel clearly seen in the Daily chart, reaching low point at around the 1.09-1.088 level.

Bears first attempt to break below 1.09 level after a long time was unsuccessful, 1.09 level seems, as expected, to be an area of strong support for the pair. If the pair manages to break this level, we may see the pair go as low as 1.05 to 1.04. On the contrary, if the FED cuts the rate again this month and the market takes the expected reaction, we may see an upward move to around the 1.13 -1.14 level.