FOMC and the U.S. dollar

The most anticipated event in financial markets since the G20 meeting in Osaka is likely to see the FOMC announce its first rate cut in over a decade this Thursday morning at 4.00am AEST. In the lead-up, the discussion has centred not on whether the FOMC would cut rates. Instead, it has been a revolving debate on the merits of a 25bp cut vs a 50 bp cut. Just one week ago following dovish comments from New York Fed President Williams the market had priced in almost a 70% chance of a 50bp cut.

The most anticipated event in financial markets since the G20 meeting in Osaka is likely to see the FOMC announce its first rate cut in over a decade this Thursday morning at 4.00am AEST.

In the lead-up, the discussion has centred not on whether the FOMC would cut rates. Instead, it has been a revolving debate on the merits of a 25bp cut vs a 50 bp cut. Just one week ago following dovish comments from New York Fed President Williams the market had priced in almost a 70% chance of a 50bp cut.

Following clarification of Williams dovish comments and some robust economic data in the second half of last week including durable goods and Q2 GDP, the odds of a 50bp cut are now back to 20%. The market appears comfortable with the idea the FOMC will deliver a 25bp cut on Thursday morning and indicate it is open to additional rate cuts pending developments abroad. 

What does this mean for the U.S. dollar?

With the market still pricing in 20% chance of a 50bp move at this week’s meeting and a cumulative 92bp of cuts over the next 12 months, the onus is on Fed Chairman Powell not to stray too far from the dovish path the market has mapped out.

Should Powell place too much emphasis on recent positives surround the underlying economy, including employment, inflation and growth data, the risks are it provides a boost to the U.S dollar.

This is likely to test the resolve of the Trump administration who according to reports in the Wall Street Journal last week decided against the use of intervention to weaken the U.S. dollar.  

As the saying goes where there is smoke, there is usually fire, and in the event, the U.S dollar rallies post the FOMC, a well-timed tweet from the U.S. President designed to limit dollar strength should not come as a surprise.

FOMC and the U.S. dollar

Source Tradingview. The figures stated are as of the 29th of July 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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