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Forget about Fed hikes – rate cut in September?

The UK decided to leave the EU in a  move that shocked global markets. This has wide implications beyond the shores of the UK and the EU. It could even tip the world into a recession.

There are many open questions  after the  UK vote to leave.  How will trade continue between the UK and the rest of the continent? Will  the BOE and the ECB provide stimulus? How will the Brexit be implemented?

The warnings about a recession in the UK do not seem exaggerated at all, at least in the short term. In the euro-zone, growth was strong in Q1 but markedly weak in Q2. This could also be the breaking point.

Outside the old continent, China continues slowing down and Japan is finding it hard to generate growth. Commodity exporting nations are already struggling.

All in all, the global economy is fragile and this could be a breaking point.

US breaking point?

The United States economy was already  growing quite slowly. The recent jobs report for May could have been a one-off, but also April’s number was weak. Inflation never really seemed to pick up.

On this background, we would have needed a recovery in the next jobs report and other positive economic indicators in the US to justify a hike in July, probably the last chance before the US presidential elections. However, data released after the Brexit  does not support it. Durable good orders fell by 2.2%, much worse than expected and core orders also missed expectations with a fall of 0.3%.

But  adding the risks of Brexit, this could certainly be  a potential breaking point. No, the US economy will probably avoid an outright recession: it is hard to see two quarters of  contraction.

But this cannot only happen on its own. The Federal Reserve, which  almost always errs on the side of caution, could certainly provide support. Yellen and her colleagues are unlikely to raise rates any time soon.

It is quite reasonable to think that raising rates in the next 12 months is out of question. The implied probability for a hike all the way to February is under 20%. Things can change and improve, but the Fed is likely to be ever more cautious.

Fed rate hike chances after Brexit

Fed rate cut?

This cannot be ruled out.  The FOMC would prefer not to reverse  policy: policymakers took their  sweet time with raising rates in December. It  was the first time in a  decade and came after huge preparations.

However, when  the going gets tough, the tough get going. And in this case, the Fed could go soft in order to support the economy: at home and overseas.

If things deteriorate, we could see a rate cut in  September, when the Fed has its next decision accompanied by a press conference. A rate cut in July could be seen as jumping the gun. Perhaps  letting markets calm on their own would be better.

But if things worsen quickly, also a July cut or an emergency move cannot be ruled out.

What do you think?

More: Brexit – all the updates

The rise of the US dollar  already serves as tightening. A stronger dollar means curbing of exports and cheaper imports – lower inflation.  Here is the Brexit  reaction:

DXY after Brexit June 24 2016

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.