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US rate cut more likely when trade tensions ease

Published: Wednesday 05 June 2019

  • US rate cut more likely when trade tensions ease
  • Australian economy slows - justifying rate cut

The EU is to launch proceedings against Italy for infringing EU fiscal rules. They are to be told to cut their budget by €3-4 billion and there are hints that Italy may capitulate but that won't play well at home and will embolden the anti-EU parties in Italy. So maybe they won't. This morning brought news of a slight slowdown in Italy's and France's service sectors and we expect similar results from other Eurozone states this morning. We will also see Eurozone retail sales data which is forecast to show contraction. After yesterday's announcement of a drop in Eurozone inflation, increased pressure on the euro is inevitable. 
Robert Kaplan, President of the Dallas Federal Reserve, weakened the USD a little yesterday when he spoke of waiting for trade tensions to ease before considering an interest rate cut. Even that hint of a predisposition towards lower interest rates was enough to knock half a cent off the value of the USD, so imagine what would happen if the Fed actually did make a cut. It seems the Fed chairs are all happier to speak when the president is abroad because we have another few speakers today. We will also see the US service sector sentiment index from the ISM. That is likely to be in keeping with last month's. This evening brings the publication of the Fed's Beige Book. This is a regional view of the US economy but we will have heard a lot of that in the various Fed speeches already, so it is perhaps less influential than it might normally be. 
The Australian dollar weakened a little overnight after economic growth data showed the annual rise in GDP for Q1 slipped to 1.8%, down from 2.3% in Q4. That validated the RBA's interest rate cut though and, once traders had taken that in the GBPAD exchange rate dropped back to 1.8140 or thereabouts. Since February, this pair has traded between 1.81 and 1.89 in two distinct spikes. If the Pound can hold onto 1.81, there is nothing to suggest it won't have another spike but a break below 1.81 opens up the chance of a dive to 1.76. You are hereby forewarned and forearmed.  
Overnight, we also saw the Caixin PMI showing a slowdown in China's service sector. That chimes with the more general slowdown in the Chinese economy and it is a worrying sign for the global economy, such is China's influence on demand for raw materials and other goods. 
And confusion reigns during the US President's trip to the UK. Opposition leader Jeremy Corbyn has clearly riled POTUS by refusing to attend a dinner last night but says he had invited the President to meet him privately. Hi offer has been declined by a President who branded him negative.

The boss had finally had enough, so he called Jerry into his office. 

"Now listen Jerry, you are a good worker, so I have let this slide for a while but people are starting to talk, so I can't keep turning a blind eye to it. You know that we work Saturdays as part of everyone's contracts but it is blatantly clear that every time Chelsea have a home game, you call in unexpectedly and don't come to work because you have to take your father to A&E."

Jerry looked aghast. "You know what boss, you are spot on," he said, "Do you think he might be faking it?"
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