While there is a consensus the Fed will cut rates later today, the key for the market may be the guidance Fed Chair Powell provides on further Fed action, writes Adam Button.

A third consecutive cut from the Federal Reserve is imminent this afternoon, but the market reaction will hinge on signals about what's coming next, especially Chair Jay Powell's press conference. 

All currencies are up against the US dollar, led by the Swiss franc (CHF) and British pound (GBP), with the Japanese yen (JPY) the weakest. U.S. advanced Q3 GDP grew 1.9%, beating expectations of 1.6%, but still below Q2's 2.0%. US October ADP report on private sector jobs showed a 125K rise vs. the exp 110K with the slowdown concentrated in manufacturing. The U.S. dollar ignored both reports. The September number was revised down to 93K from 135K.  

Fed day is finally here and along with month-end it will surely unleash some pent-up volatility. The market is pricing a 94% chance of a rate cut and it would be the biggest monetary policy surprise in a decade if the FOMC were to defy that.

The intrigue lies beyond Wednesday. The market is currently pricing in a 27% chance of a cut in December. That was above 40% midway through the month and near 50% at times in September but has trended lower as U.S.-China trade talks showed signs of progress. At this point, a Phase One deal and an extended ceasefire are solidly priced into markets and that's probably what the Fed will assume going forward.

At the same time, the Fed is loath to remove optionality and will preserve the option of easing further if trade or the economy deteriorates. The goal of post-meeting communication will likely be to keep December cut expectations around where they are now. In theory that should mean minor tweaks in communication.

The main risk with today’s announcement is a communication error. The most-recent Fed minutes indicated a growing push to communicate to markets this isn't a rate-cutting cycle. If Powell strikes the wrong tone in that signaling and dials back expectations too hard, that could spook equities. A similar message may also arise in the number of dissents or overly-optimistic economic commentary.

Can Equity Indices Rally Further?

Yes, sure. Powell could over-emphasize low inflation and economic risks; talking further about manufacturing and downside economic risks abroad. The market could take that as a signal about more cuts, which would weaken the dollar and breathe fresh life into gold. The best case scenario for stocks and worst one for the JPY would be for Powell to send the message that further easing is precautionary, rather than reactive to a serious erosion in growth.

Ultimately, Powell has gained some experience in his role and should have a relatively easy time of managing expectations.

With regards to today's Q3 GDP release, it's far too early to get an accurate read on Q3 and these numbers are routinely revised significantly over the following months. The market is also jittery about a soft October jobs report because of the GM strike. The strike was not reflected in the ADP.

Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.