GBP/USD: Federal Reserve cuts rates as expected, cable drops

• The Fed cuts rates by 25bp as expected and GBP/USD falls.
• Fed cuts interest rate on excess reserves to 1.55% from 1.80%.
• US data remains solid and supportive of the US Dollar. 
• Brexit remains the major risk for GBP cross traders, UK elections polls point to a Tory win. 

The US Federal Reserve interest rate decision was in anticipation this month, falling within a very eventful end of the month with plenty of geopolitical background noise as well as crucial global economic data.

• US dollar index rises to session high of 97.80, from 97.72 , after the Fed cuts rates

In the first instance, the Federal Reserve cut interest rates by 25 basis points, as widely expected, the third cut since July. Indeed, between the last decision, the Fed had not attempted to persuade markets of any other outcome. The outcome of this should spur some life into the US economy as we approach Christmas, with investment supporting the US Dollar in the near term.

Key takeaways from the Fed

• Rates lowered to range of 1.50%-2.00%.
• Markets priced in a 97% chance of a cut before the decision.
• Prior range was 1.75%-2.00%.
• Uncertainties remain, will assess appropriate rate path.
• George and Rosengren wanted no change.
• Change of wording in the statement says it will monitor incoming info "as it assesses the appropriate path" for the target range.
• Sets IOER at 1.55%, as expected.
• Economic activity has been rising at a moderate rate, the same as prior.
• Repeats that job gains have been solid, on average, in recent months, and the unemployment rate has remained low.
• Household spending has been rising at a strong pace vs 'appears to have picked up'.

Change in a statement:

The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.

Vs prior:

The Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

Jerome Powell, Chair of the Board of Governors of the Federal Reserve System, is scheduled to deliver his comments on the monetary policy outlook in a press conference at 18:30 GMT. 

US consumer needed a boost

Indeed, a rate cut will be supportive of the US consumer, and much-neded considering yesterday's outcome whereby the U.S. consumer confidence unexpectedly fell to a four-month low as economic expectations dimmed. This should be a warning sign that the consumer spending that’s been propping up the expansion may have faced challenges ahead. 

Meanwhile, the data from the US today was somewhat more encouraging. The US 3Q Gross Domestic Product growth came in a little ahead of market expectations at 1.9% –  This was the first rise in residential investment since 4Q17. However, analysts at ING Bank commented saying that with "business surveys signalling further weakness is likely in 4Q19 and 1Q20 the Fed is unlikely to be finished easing policy after today's meeting."

Case for a December rate cut from the Fed

The analysts at ING Bank expect 4Q GDP to be even weaker than 3Q’s given the slowdown in employment. "Wage growth is likely to lead to a deceleration in consumer spending growth while durable goods orders suggest investment spending is likely to contract for a third consecutive quarter in 4Q19."

With net exports unlikely to fill the gap we are currently forecasting 4Q GDP growth of 1.4%. 1Q20 could be even worse with the ISM surveys suggesting little reason for a turnaround in growth over the next six months Given this backdrop we doubt the Fed will pause for long after cutting interest rates again later today. We continue to look for a December rate cut with a further move likely in 1Q20.

Key manufacturing data ahead:

• Trade war with China suffocating US manufacturers - GT

Brexit shenanigans

Meanwhile, on the Brexit front, the UK House of Commons agreed to have a general election on December the 12th yesterday and UK opinions polls clearly suggest that the Conservative party are likely to win the most seats after a general election. 

The fact that GBP has gained so much ground this month, from the floor of 1.22 to a high of 1.3011, of over 6%, reflects the perception that the risk of a no-deal Brexit is off the table for now. "While it is likely that cable will spike to the 1.32 area and potentially beyond if parliament manages to pass Johnson’s Brexit deal into law, any hiccups on subsequent trade talks between the UK and the EU could leave the pound exposed," analysts at Rabobank argued. Also, the analysts were noting that the fear of a no-deal could return either in respect to January 31 or at the end of next year.

GBP/USD levels