Slowly, weekends are no longer synonymous with rest and relaxation. In the past few days, devastating floods have hit nearly all of Central Europe, another attempt to assassinate Donald Trump was thwarted in Florida, and the Chinese have once again shown alarming economic data. However, for investors these events seem to be of little importance as they are increasingly embedded in the “Fed cave”. Again, expectations for US rate cuts are surging higher than any dove would dare.
Lot of Noise, but Rates Matter
The past weekend was certainly not peaceful, but the tragic events associated with the floods in Central Europe do not have a particular impact on sentiment around the countries and economies of the region. Similarly, it is difficult to see the impact of the second attempt on Donald Trump’s life, which can escalate the already heated presidential campaign. Finally, weak data from China only confirmed the already known issues of their market (industrial production +4.5%, and retail sales +2.1% annualized, both below latest readings and forecasts), which did not constitute a strong impulse. This impulse came from a completely different side and unexpectedly, with fundamentals that are difficult to pinpoint. Over the weekend, the market decided to play all in and is expecting a 50 bp cut from the FOMC on Wednesday. Just a week ago, interest rate futures suggested a 30% chance of such a move, and now it’s twice as high, with investors considering this scenario as baseline. Moreover, investors are expecting a 120 bp cut by the end of the year and a massive 250 bp by next September. In this way, the cost of money would be halved in just 12 months since the beginning of the easing cycle. It’s hard to find reasons for such aggressive approach by investors to Federal Open Market Committee’s actions. But this wouldn’t be the first time they are trying to put pressure on decision makers. So far, without success.
A Bear Trap?
However, the change in interest rate cut expectations across the ocean has clear consequences in markets. The EUR/USD exchange rate has shot up and is already a cent above the morning level. At $1.112, it is attempting to breach the upper limit of the downward trend in place for the last three weeks. If this trend is maintained, we can expect the year’s highs at $1.12 to be challenged before Wednesday evening. It is worth keeping in mind though that US decision makers might not deliver on the market’s current expectations. The correction associated with this could be steep, as markets will get far more than just September’s decision on Wednesday. Economic forecasts and more importantly, the dot plots – current expectations of central bankers about the level of interest rates in the coming quarters – will be released. A significant divergence of monetary scenarios will be an excellent opportunity for violent movements in many assets. Especially as, for example, a stock market correction would fit perfectly into the historically weak second half of September.
PLN Holds Steady
A scenario of USD weakening in the broad market is good news for the PLN, but apart from the dollar exchange rate breaching 3.84 PLN, the Polish zloty is holding its own quite calmly. The EUR/PLN is down to 4.27, CHF/PLN is starting to glance at 4.54, and GBP/PLN is still close to 5.07. Sterling is helped by expectations of no rate move from the BoE (meeting on Thursday). In addition to the UK, the central banks of Norway, Turkey and China also have meetings this week, so it’s worth watching NOK, TRY, and finally CNY. In the end, such a buildup of events, plus the US sales and production readings, have enormous potential to increase volatility in the coming days.
Author: Adam Fuchs, Currency Analyst, Walutomat.pl
Source: https://managerplus.pl/koniec-wielkiej-stopy-w-usa-98979
