Emerging Markets and Global Currencies to Jump with Their Hands in Air, as Fed Dangles Keys to Possible US Rate Cut

A collective sigh of relief has roared across financial markets after the Federal Reserve confirmed market expectations of the probability that interest rates in the United States will likely be cut over the coming months.
Lukman Otunuga

Open your FXTM account today

The Fed has essentially left the gates wide open for speculation to persist that a reduction in US interest rates could occur as early as July. Investors on a global level have historically enjoyed the suggestion of lower interest rates from developed central banks, and the most developed central bank of them all signaling lower interest rates is going to fuel another market rally. Equity markets will not be the only asset class to enjoy this news, with the prospects of a weaker Dollar moving forward accelerating another superb move higher in Gold.

It is emerging markets however who will most enjoy the news of lower interest rates. We can expect for flows to move back towards emerging markets moving forward, meaning that EM stocks and their currencies will continue to edge higher against the USD. This rally will stretch across multiple corners including the Chinese Yuan, Malaysian Ringgit, South African Rand and as far afield as the Mexican Peso.

Emerging markets across Asia, Africa, Latin America and the Middle East will all move to applaud the news that lower interest rates in the United States will encourage capital to spread across multiple developing regions.

How soon can we expect the Fed to potentially cut rates?

Persistent uncertainties around the global economic outlook and muted inflationary pressures are already presumed to have encouraged at least one voting member of the Federal Reserve, such as James Bullard, to cut interest rates this month. Expectations are high that the anticipated interest rate cut from the Fed could occur as early as July, but there is the possibility that it might not occur as soon as financial markets are hoping for.

It must also be kept in mind that a rate cut in July is contingent on the outcome of the G20 meeting between US President Donald Trump and Chinese President Xi Jinping.

If the United States and China do find a resolution to the long-standing trade tensions, this will cause a rapid shift in the economic outlook and could even mean that the Federal Reserve throws the keys to lower US interest rates out of the fast-moving car.

The bottom line is that should the G20 meeting in Japan end on a positive note, with US-China relations improving and stronger US economic data emerging, the Fed is unlikely to push the button on lower interest rates.

This is a potential outcome that can very well become frightening and represent a significant risk to global equity markets when considering how confident everyone has become today that the Fed will be cutting US interest rates.

Weakness in the USD encouraged Dollar Index to slide down the ladder

Appetite towards the Dollar is weakening at lightning speed on market confidence that the Federal Reserve will be cutting interest rates. This can be seen in the Dollar Index (DXY), which is trading below 97. The DXY is likely to sink towards 96.50 in the near-term as investors attack the Dollar.

Weakness in the USD will mean a coordinated round of strength for currencies across the world.

Gold smiles on US rate cut expectations

Gold is shooting to the stars, comfortably securing a fresh 5-year high above $1390 this morning thanks to a downbeat Federal Reserve.

It is widely known that Gold flourishes and blooms in low interest rate environments, with a weakening Dollar supporting upside gains. With geopolitical tensions, ongoing US-China trade developments and concerns over slowing global growth clearly straining risk sentiment, Gold is likely to remain in fashion moving forward. In regards to the technical picture, the precious metal is heavily bullish on the daily charts. The bullish momentum has the potential to send prices towards $1400 by the end of this week.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US