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US Inflation Rate Drops Fueling Speculation of a Fed Rate Cut

By Glenford S. Robinson

It is pretty much a far-gone conclusion that the Federal Open Market Committee (FOMC) chaired by Mr. Jerome Powell will slash interest rates at the end of this month July 2019. The US annual inflation rate tumbled to an undesirable low of 1.8 percent in May 2019 from a five-month mini run in the previous month.

The 1.8 percent recorded in May 2019 came in a tad below the forecasted 1.9 percent. The FOMC president Mr. Powell was questioned on Capital Hill today by various members of congress about the likelihood of a fed rate cut in July 2019. The FOMC president tried dancing around the questions, but eventually had to give into questions about the Feds cutting rates, saying “yes” to a congressman who asked him whether or not his committee was considering cutting rates. He later tried his best not to give any more clues as to whether or not his committee was in fact going to cut rates.

A Fed rate cut of about 25-basis points is more in-line with the hints the Fed Chair was signaling. So, it seems that there will be a rate cut but not a very large one. To get the inflation rate back up to 2% from 1.8% does not justify a rate cut more than 25-basis points; any rate cut larger than 25-basis points would be unnecessary.

What does this mean for the EUR/USD currency pair? Well, one would expect that the Euro would be on a rampage running higher. In fact, that is exactly what is currently happening as of writing. The USD has been put under pressure by all major currencies so far today.

Although the European union is considering implementing negative interest rate at the end of July, the Euro is still putting major pressure on the USD. The current price of the pair as of writing is 1.1255, a tad below the high of the day of around 1.1264.

Traders are net long at 65% and net short at 35% which is telling us that this upward momentum by the pair could be a temporary one from a contrarian point of view. Therefore, a strong pullback could be lurking around the corner.

The bottom line is that the Eurozone interest rate is currently zero percent, which tells us that investors are not necessarily too eager to buy a currency that is currently sporting zero interest rate and possibly negative interest rate in the-not-so distant future.  So, a pullback seem likely before the weekend or early next week.

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