Today, many traders and analysts are waiting for the Federal Reserve to lower interest rates for the first time since 2008. Virtually, no one doubts such a decision, and therefore the entire emphasis will be built on the Fed’s forecasts and on the speech of President Jerome Powell, who will shed light on the future of monetary policy. It is about further reducing rates and stimulating economic growth.
In the meantime, the current economic situation does not require more serious intervention, and with the exception of weak inflation, the weakness of which can also be called rather relative, other fundamental indicators are at a fairly good level. Yesterday’s report on the consumer confidence index in the United States, which has once again grown seriously, serves as confirmation. Preliminary data on US GDP growth in the 2nd quarter of this year, which were recently published, also indicated a more active economic growth compared with economists’ forecasts.
However, the Fed will reduce rates, as the development of the economic situation does not meet expectations. And as I noted above, the main reason is the weak rate of inflation. Even despite the labor market, which is at its historical highs, as well as high growth rates of jobs and wages, all this cannot ensure a steady increase in inflation to the target level of the Fed in the region of 2.0%.
If we analyze a larger time period, then the current interest rate of 2.5% is at a fairly low level, which should have led to a surge in inflation. Most likely, it is for this reason that in order to prevent an increase in deflationary risks, the Fed will go on a one-time reduction in interest rates during today’s meeting.
Another thing is what course will be chosen before the end of the year. If Powell signals a further rate of low interest rates, the US dollar is likely to weaken more than already established by traders in a one-time reduction scenario.
However, one should not forget that the problems in the EU and the UK are much more significant. The ECB plans to cut interest rates to a negative level, and London is developing a plan for leaving the EU without an agreement. This suggests that even a small decline in the US dollar after today’s decision by the Fed will not disrupt the medium-term uptrend against risky assets.
As I noted above, the US consumer confidence index rose significantly in July of this year. This suggests that, despite all the foreign policy problems, trade disputes and the slowdown in global economic growth, consumers are confident in the strength of their country’s economy.
According to the Conference Board research group, the consumer confidence index rose to 135.7 points in July from 124.3 points in June. Economists had expected the index to be 124.8 points. It should be noted not only a good assessment of households of the current economic situation, where the index rose to 170.9 points, but also the growth of expectations regarding the conditions for doing business.
Yesterday afternoon, a report was also published on US consumer spending growth, which, although slowed down, remained very strong, which once again confirms the fact of high consumer confidence in its economy.
According to the US Department of Commerce, personal spending by Americans rose by 0.3% in June compared with the previous month, while personal income increased by 0.4%. Growth marks the fourth month in a row. Economists had forecast revenue growth of 0.4% and spending growth of 0.3%. Let me remind you that consumer spending is about two thirds of the country’s GDP, and their growth has a positive effect on the main economic indicator.
Data on the US housing market did not attract the attention of traders. According to the report of the National Association of Realtors, the index of signed contracts for the sale of housing in June 2019 increased by 2.8% compared with the previous month and amounted to 108.3 points. Economists had expected the index to grow by 0.4% in June. House prices in the US slowed down in May due to weak demand and low sales. According to the report, the national house price index in May rose by 3.4% compared with the same period of the previous year, after rising by 3.5% in April.
As for the current technical picture of the EURUSD pair, serious changes in the market will occur only towards the evening, when the Federal Reserve System will announce its decision on interest rates.
While trade is conducted around the level of 1.1150, from which the main movement will be formed. It will be possible to talk about the change in the current short-term trend only after breaking through the level of 1.1185, which was formed last week, above which the maximums open around 1.240 and 1.1310. In the event of a return to pressure on the European currency, support will provide a weekly minimum around 1.1115 or a larger area of 1.1090.