The United States Dollar, relatively flat in trading yesterday, is playing defense this morning ahead of the Federal Reserve’s crucial interest rate decision this afternoon.
Overview
Today’s release will also be accompanied by an updated dot plot, stating how much easing the Fed itself sees coming down the pipeline and when, and a press conference from Chair Jerome Powell at 2:30 PM. Ahead of these key developments, the Dollar has a negative tinge across the G10 board in quite choppy trading as markets position themselves to bear the burden of a decision that promises to bring lots of volatility to FX markets.
Rhetoric from Fed officials over the last few weeks has all but guaranteed that some sort of easing cycle will begin this afternoon, and equities, along with emerging market indices, have been ebullient. US stocks are set to open just off record highs, and treasury yields have fallen substantially from their highs in October of last year. The MSCI emerging market currency index has continued to notch gains over the last week. Gold also, is trading just shy of record highs as investors search for new returns in the face of easing from the Fed.
The question remains, however, as to just how much easing the Fed will kickstart this cycle with, and markets for the last few sessions have been quite close to evenly split on whether the US’ interest rates will be cut by 25 or 50 basis points. Equities, for their part, are clearly hoping for a larger cut, but it’s not clear that the macro picture in the US has weakened enough to support such a move. Fed officials have, though, openly discussed the possibility of a jumbo cut in speeches the last couple of weeks, which does lend credence to that school of thought, but the flip side remains that the US is not in danger of entering a recession at the moment and such a move may cause a market panic about the health of the US economy and backfire. All markets know, at the moment, is that about half of traders are going to be wrong this afternoon, prompting large swings and big volatility in FX and other markets.
What to Watch Today…
- Bank of England Interest Rate Decision, Thursday
- Bank of Japan Meeting, Friday
- Monex USA Online is always open.
GBP ⇑
Pound Sterling, after slipping in morning trading yesterday, has recovered some ground and is once again trading on the front foot ahead of both the Federal Reserve this afternoon and the Bank of England’s interest rate decision tomorrow morning. The UK released its CPI figures for the month of August this morning, and all readings were as expected, though still higher than the previous month. GBP has gained more than half a percent this morning on expectations that, as the Fed kickstarts its easing cycle today, the Bank of England will overall bring down its interest rate less than its counterpart in the US and keep Sterling supported.
AUD ⇑
The Australian and New Zealand dollar are big beneficiaries of this morning’s dip in dollar pricing, trading 1.4% and 1.7% stronger against USD, respectively. This rally places both currencies close to the week’s highest levels, which also marks the strongest point the Antipodean currencies have seen against the USD in several months. Though the Reserve Bank of New Zealand is all but guaranteed to cut interest rates at its next meeting in October, its counterpart in Australia is, by contrast, more than likely going to hold key rates steady, keeping to some extent both currencies afloat. Australian employment data is due out tomorrow morning and is set to show an unchanged unemployment rate of 4.2%.
