As the Mexico episode dims from memory the market is turning towards the Federal Reserve and how it might handle the US-China trade war. Boris Johnson led the 1st round of ballots for the PM race (more below). The Swiss franc, CAD, silver and gold are the top performers, while AUD and NZD are the big losers. Here is a tweet below from Ashraf 3 weeks ago about the upcoming Fed policy error.
The Federal Reserve is in a tricky situation. An escalation in the US-China trade war appears to be coming but a deal could also materialize quickly. Many market watchers now expect the Fed to signal at next week's meeting that they will cut rates if a trade war erupts but there is a problem with that thinking.
Greg Ip in the WSJ on Wednesday compared the upcoming meeting to 2003 and the dawn of the US-Iraq war. The Fed was contemplating cutting rates in March but wasn't sure entirely sure it would break out. Shortly afterwards the bombs started falling and the Fed cut.
On the surface, it's an apt comparison but the problem with a trade war is that there isn't necessarily a clear demarcation on when it will come. Undoubtedly the US imposing fresh tariffs on the $300B of untaxed Chinese goods followed by a response from Beijing would qualify but what if the steps are smaller. Arguably we're in a trade war already.
What we will look for from the Fed is a better idea of the conditions necessary to cut. Would a small escalation from either side plus a slide in economic data be enough? Probably not and the market may be underpricing that risk. Markets are fully pricing two rate cuts by end of September.
The important point is that this event is binary in the way a shooting war is and the most-likely outcome is that we remain in the gray area. Until there is clarity expect heightened volatility, a focus on economic data and a modest risk-off tone. The time lag involved from the start of teh tariffs to the economic impact could also worsen the problem of the Fed policy error.
Johnson Leads the 1st Ballot
Boris Johnson led the 1st ballot for the PM Race with 114 votes, followed by Jeremy Hunt (43), Michael Gove (37), Dominic Rabb (27), Sajid David (23), Matt Hancock (20), Rory Stewart (19). The 7 candidates progress to the next round of voting next week, but watch Sunday's televised debate on Channel 4. The final 2 candidates will face each other in a final vote later in the the month.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.