First US Interest Rate Cut Since 2008

USD

The Federal Reserve made the first cut to interest rates since 2008 on Wednesday evening, however the dollar moved to two-year highs in the immediate aftermath. This was due to the fact that Fed Chair Powell stated that the move was a one-off insurance cut and that it would not signal the beginning of a rate-cutting cycle.

The 25 basis point cut was anticipated by the market, however markets were priced in for a more dovish outlook than the one that the Federal Reserve delivered. Instead, the statement upended expectations of further rate cuts. A day prior, traders had forecast a 35% chance of three cuts by the end of the year; now this has fallen to 12%.

EUR

The euro suffered from yet another round of disappointing data on Wednesday as the Eurozone economy expanded by just 0.2% in the second quarter, down from the 0.4% for the first quarter. The Eurostat also estimated that core inflation dropped from 1.1% to 0.9% in July whilst the headline inflation figure fell to 1.1% from a previous 1.3%. Disappointing data like this only serves to increase the likelihood that the ECB will launch a big package of stimulus in September in order to try and revive the Eurozone economy and get the inflation number closer to the 2% target.

GBP

After four consistent days of losses the pound found some respite on Wednesday and steadied from the two-year lows. Rather than this being a result of Boris Johnson’s visit to Northern Ireland, the pound actually benefited from month-end sterling demand. Trading volumes have now returned to more normal levels and as a result, volatility has eased after the initial plunge at the start of this week.

However, there is unlikely to be sustained respite for the pound in the short term as the probabilities of a hard Brexit have increased since Boris Johnson took the reins of power. He and his cabinet have reiterated their commitment to leaving the European Union at the 31st October deadline, regardless if a deal is in place or not.

Key Announcements

12:00 – GBP: Bank of England Interest Rate Decision; expected to remain at 0.75%
12:00 – GBP: Bank of England Meeting Minutes
12:30 – GBP: Bank of England Governor Carney Speech
15:00 – USD: ISM Manufacturing PMI (Jul); expected to increase to 52.0 from previous 51.7