Expected rate cut next week


The FOMC will be meeting next Tuesday and Wednesday, October 29-30. According to a report from Goldman Sachs, the expected cut in rates will be the last one for quite some time. Fed officials are likely to declare the end of the “mid-cycle” adjustment that Chairman Jerome Powell inferred in July, according to Goldman analysts. It is also possible the Fed could remove the language stating that the central bank will “act as appropriate to sustain the expansion”. It’s also widely expected that the FOMC will approve a quarter-point reduction, taking the target range for the funds rate down to 1.5% to 1.75% and assigning a 95% cut probability.


The ECB monetary policy meeting was a non-event. No changes were announced to the current easing path, and President Draghi’s message was quite the usual on risk, growth, and inflation. In his last meeting as President of the ECB, Draghi insisted on the need for an EU fiscal policy, something that he fought for in his eight years. He defended stimulus during his last meeting and refused to comment on any future action by incoming president Christine Lagarde. EUR/USD received a boost earlier this morning, as German IFO Business Climate Index came in at 94.6 in October, the same as last month and slightly better than the expected number of 94.5.


The EU 27 is expected to debate today on whether or not to grant the UK another Brexit delay. According to reports, the purpose of the extension would be to “allow for the finalization of the ratification” of the withdrawal agreement. There is no consensus on a date as of yet, as some leaders are floating the idea of a “flextension”. Some EU leaders want to see the result of UK Prime Minister Johnson’s early election motion before deciding on a date. Yesterday, PM Johnson called for an early election on December 12 and the House of Commons is due to vote on that on Monday. In a letter sent to opposition leader Jeremy Corbyn, he stated that “prolonging the Brexit paralysis in 2020 would have dangerous consequences for businesses, jobs and for basic confidence in democratic institutions, already badly damaged since the referendum”. GBP/USD moved lower on this news yesterday and could be sensitive to any news today.


Economic data out of Japan was slightly discouraging. According to the official release, the preliminary estimate of October, Jibun Bank Japan Manufacturing PMI fell to 48.5 in October, the lowest level since June 2016 and signaled contraction for a sixth consecutive month. In addition, the Leading Economic Index was reported at 91.9 in August, better than anticipated yet well below the previous, while the Coincident Index for the same month fell to 99.0.


Rising crude oil prices allowed the commodity-related Loonie to strengthen. Heightened expectations of the OPEC+ introducing additional production cuts in December and falling crude oil stocks in the US fueled this week’s rally. There won't be any significant macroeconomic data releases from Canada today and the Canadian Dollar is deemed likely by investors to continue to react to changes in crude oil prices.


US Trade Rep. Lighthizer and Treasury Sec. Mnuchin are expected to speak with Chinese Vice Premier Liu today by phone. Work continues on the Phase One agreement as signing is still expected at the AFEC summit on November 16-17. As negotiations continue, it’s been reported that China will ask the US to drop the plan to impose more tariffs on Chinese goods on December 15. In exchange for this, China is reported to be ready to buy at least $20 billion of American farm products, as part of the Phase One deal. If this occurs, it would bring purchases by China back to the 2017 level, where they were before the trade war began. As we move forward with tariff removals, purchases could rise further to $40-50 billion.

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