The US is in its 11th year of economic expansion, which is currently under threat from the ongoing 15-month US-China trade war and a potentially chaotic no-deal Brexit. Tuesday’s Producer Price Index (PPI) showed the largest drop in eight months and, combined with today’s weak consumer prices, raises the odds of another Fed rate cut. ING’s Chief International Economist, James Knightley commented: “Looking at the data flow between now and the October 30 FOMC meeting, we have to say the odds of a third rate cut from the Fed are likely to increase.
“The last Fed officials scheduled to speak are Charles Evans and John Williams on October 17, but by that point, we suspect a 25bp cut will be virtually certain in the market’s mind versus the 76 percent (19bp) currently priced.”
Data released this morning revealed that, while the UK economy shrank in August, upwardly revised growth for June and July showed a better-than-expected three-month growth rate of 3 percent.
This reduces the odds of a UK recession in the third quarter.
KPMG UK chief economist, Yael Selfin was upbeat: “Despite the contraction in GDP in August, the risk of the UK economy falling into a technical recession is still remote, due to strong growth in July. Also a potential new round of stockpiling will likely help boost GDP growth in September and October.”
Looking ahead to the end of the week, the pairing is likely to be left muted on Brexit pessimism and US-China trade tensions.
French President Emmanuel Macron has said the EU will offer a formal response to Prime Minister Boris Johnson’s “final” deal at the top of the week, but with analysts predicting a broad rejection of the proposal, markets will perceive a heightened risk of a no-deal outcome which could see Sterling slide on Friday.
Meanwhile, the dollar is likely to fall if US import and export prices slump further than expected, revealing the world’s largest economy has suffered as a result of ongoing US-China trade tensions.