U.S. Fed likely to cut interest rate by 25 bps in July

In spite of the recent easing of tensions in the U.S.-China trade war, there are signs of weakness in the economy along with continued sub-target inflation point to a 25 basis point interest rate cut during the upcoming July meeting, said DNB Markets in a research report.

The markets seem convinced that the Fed funds rate would be reduced by at least 25 basis points during the upcoming meeting 31 July. Fed’s senior officials have so far not tried to correct the market view.

“We interpret this as an indication that the FOMC is planning to cut the signal rate by 25bp at the upcoming July meeting. On the other hand we regard a 50bp cut to be almost unlikely as long as there has not been a marked deterioration of the data since the June meeting”, said DNB Markets.

James Bullard, who voted for a cut in June, recently argued that a 50 basis points cut in July might be too much. To lower the rate by 50 bps might lead to more uncertainty than reassurance and the central bank might prefer to follow up with more cuts in the autumn if required. The markets indicate that a 25 basis points cut is likely at the September meeting.

“We find this to be too aggressive unless data deteriorate markedly and expect another 25bp interest rate cut to take place in October. We previously forecast cuts in September and December”, added DNB Markets. 

At 19:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was neutral at -25.06 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex