This week is an important week for the USD with a number of key economic releases scheduled to take place. In total there are over 45 data releases scheduled when you review the economic calendar. The largest and potentially most important is Wednesday evening when the Federal Reserve (FED) are scheduled to confirm whether they are changing the interest rate in the world largest economy. The FED is likely to cut interest rates and if confirmed this would be the first time it has been cut for over a decade.
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Economic data last week showed that the US grew at an annual rate of 2.1% in the second quarter, faster than expected however slower than the first quarter of this year. However, the rate of growth seems to be slowing which is where the speculation has been building. Even President Trump has got involved this week via Twitter, saying the FED “will do very little by comparison” to Europe and China. He went on saying “The EU and China will further lower interest rates and pump money into their systems, making it much easier for their manufacturers to sell their products. In the meantime, and with very low inflation, our FED does nothing - and probably will do very little by comparison. Too bad!"
The counter argument is that with the US economy growing at about a 2.6% annual rate for the first half of the year, plus adding a higher-than-expected 224,000 jobs in June why would a rate cut be needed?
There is however a slowing global economy, the US trade war with China and low inflation in the US. The FED themselves have signalled that it will vote for an unusual “insurance” rate cut to head off a potential downturn. The thinking is that with rates already low, the FED would have little room to cut in case of a recession. The IMF recently highlighted cutting forecasts for global growth this year to 3.2% from 3.5% at the start of the year, which would be the weakest since the financial crisis. Others are saying that a 0.5% base might be announced. Red flags in the US economy for example manufacturing, while only about 10 percent of the economy, was in a technical recession for the first half of the year following two quarters of negative growth in that sector, and conditions in Europe and China remain weak. “We would have a much bigger problem if the FED didn’t cut rates,” said Diane Swonk, chief economist at Grant Thornton.
Outside of economic data US politics continues. The US government continues to run up debt and there is an agreement as to how high that debt can get before approval for more money is needed. In the past this has resulted in a partial government shut-down as Democrats and Republicans have not come to an agreement to extend the 'ceiling' higher. Last year President Trump argued that he needed more money for the wall which resulted in one of the longest government shut-downs ever of 35 days. Recently however a US budget deal was agreed, raising the debt ceiling and removing the risk of a default until 2021 theoretically.
The battle over funding for the wall however continues, with elections around the corner, however President Trump has been given a green light from the Supreme Court to spend excess military personnel funds and other Pentagon money on border wall construction.
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