A US rate cut is likely coming – but when?

US Dollar Highlights

• US trade war may expand to Vietnam

• ‘Do or die’ Brexit?

Sterling - US Dollar (GBPUSD) FX Technical Analysis

Another three months down the line and GBPUSD is still facing much the same major issues. Brexit is still unresolved, but adding to the pressure on the Pound is the new Tory party leader contest and the growing possibility of a no-deal Brexit, with all the uncertainty that brings. In the United States, talk of an interest rate cut has weakened the Dollar against major pairings – although given the problems of Brexit, the Dollar has still managed to made gains against the vulnerable Pound. The US-China trade war may have been temporarily halted, but it could erupt at any time and now Vietnam might be drawn into the battle. From April-June in typical mid-market rates, GBPUSD varied from 1.252-1.317. The high came on 4 April on optimism as the Government announced it would talk with the Labour Party over Brexit options. The low was on 18th June over fears that Chancellor Philip Hammond might resign over £9billion spending proposals voiced by Theresa May.

A US rate cut is likely coming – but when?

Lower interest rates may be coming for the first time in a decade, the Federal Reserve has suggested, but the timing is still an issue. The Fed kept rates on hold in June in a range of 2.25%-2.5%, but Chairman Jerome H. Powell warned it would consider cuts due to slowing growth, which has been dragged down by the US-China trade dispute, and low inflation. In addition, it dropped a reference to being “patient” on borrowing costs from its agreed position. This is good news for President Trump, who has hit out at the Fed several times for not lowering rates, as he believes the Dollar is too strong. The cut could come as early as July, the Fed has hinted. The Federal Open Market Committee still believes that the jobs outlook will remain strong, and inflation will be near its 2% target but it admits “uncertainties about this outlook have increased.” As a result, it will “closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”
However, policymakers are divided on when the rise should happen, with almost half - eight of the 17 members - favouring a cut by the end of the year, eight wanting no change and one wanting an interest rate rise, according to updated quarterly forecasts. Some investors believe the Fed will reduce rates as soon as July, although most economists think December is a better bet. At a Council on Foreign Relations meeting in late June, Mr Powell explained, “Last week, my Federal Open Market Committee (FOMC) colleagues and I held our regular meeting to assess the stance of monetary policy. We did not change the setting for our main policy tool, the target range for the federal funds rate, but we did make significant changes in our policy statement. Since the beginning of the year, we had been taking a patient stance toward assessing the need for any policy change. We now state that 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 two percent objective. The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation.”
US trade war may expand to Vietnam

A fresh truce has been announced in the US-China trade war – just at the time as President Trump has talked of escalating action to include Vietnam. Since the trade war began almost a year ago, 25% tariffs have been placed on US$250 billion worth of Chinese goods for “unfair trade practices”. President Trump has threatened to increase tariffs on $200 billion of Chinese goods from 10% to 25%. China has added import duties on US products worth $110 billion. At the G20 meeting at the end June in Osaka, Japan, a new truce was announced by the two sides. This suspended the planned $300billion imposition of tariffs of up to 25% on remaining Chinese imports while the two sides are in talks. But President Trump says if those fail, he is prepared to go ahead with the additional duties.
Vietnam has been a big winner of the US-China trade war with exports and foreign investments both growing. Now, the U.S. Treasury is investigating Vietnam over potential currency manipulation. It is also claimed that some Chinese exporters are sending their goods via Vietnam using fake origin labels to avoid the tariffs. For instance, China’s top import to the United States, mobile phones and associated equipment, fell $5.82 billion from January-April 2019. That is a 27% drop to reach a six-year low. At the same time, US imports from Vietnam are up $3.57 billion. That is a 177% hike. When asked about tariffs on Fox Business Network President Trump said, “Well, we’re in discussions with Vietnam.” He went on to call Vietnam “almost the single worst abuser of everybody.”

‘Do or die’ Brexit?

With Brexit uncertainty ongoing, as both Conservative leadership contenders say they want to renegotiate Brexit – highly unlikely! The new European Commissioner confirms that the Irish backstop must be in the withdrawal agreement and that’s been the same sticking point we’ve had for the last two years… But this all increases the risk of the UK leaving the EU with no deal. Adding to the misery for the Pound, UK data is showing signs that the UK economy, like many countries, is slowing down.
What next for Sterling-US Dollar?
In the next three months, a decision may finally be taken over what kind of Brexit the UK faces. The new Tory party leader and likely UK Prime Minister will want a deal with Europe, but both Boris Johnson and Jeremy Hunt say they are prepared for a no-deal scenario. That is likely to see the Pound weaken. But with a possible interest rate cut on the cards, the US Dollar may also lose ground against leading currency pairings, if the Fed decides to act. Whatever happens, if you are exchanging Sterling and/or US Dollars, it is best to obtain guidance from your Halo Financial Currency Consultant.

Guidance for USD buyers

Things are looking extremely bleak for dollar buyers as the Pound has dipped to 6 month lows of 1.2500. These are critical levels – We have not been below here in a meaningful way since April 2017. A weekly break below 1.2500 would signal a move towards 1.2000. The momentum indicators are emerging from oversold levels so it would be worth leaving some protection below 1.2500 hoping for a bounce towards 1.3000.

Guidance for USD sellers

It would be prudent to cover part of any exposure close to current levels, these are the month lows and rates have not  been signicicanlty lower for over 2 years. A break below 1.2500 would suggest 1.2000 could be tested.