Piling onto the losses seen in the back half of last week, the United States Dollar is being sold off decidedly this morning to the tune of nearly half a percent across the G10 board.
Overview
The Bloomberg Dollar Spot Index dropped overnight to its weakest levels in more than eight months as speculation on not if or when but how much the Federal Reserve will ease at its meeting this week continues to confound markets. As recently as last Tuesday, traders saw just a 20% chance of a so-called ‘jumbo cut’ of fifty basis points. At the time of writing this morning, the chance of such a move, priced by interest rate swap traders, is up as high as 67%, with at least 25 basis points of easing completely priced in.
Though this desk still believes the Fed is far more likely to make a smaller move this week compared with a larger one, shifting market odds are a key factor behind this repricing swing for USD. If the Fed were to make what could be called an outsized move on Wednesday afternoon, this would bring sweeping change to interest rate differentials around the world and could mean a sustained move weaker for USD as investors look to move their cash elsewhere around the world. Such a possibility has already begun to be priced in when looking at treasury yields – the yield on two-year US bonds moved back toward its lowest level in two years, weighing further on USD. The US does currently have, however, the highest target interest rate in the G10, so the effects of a larger immediate cut could drive down premium pricing on FX forwards as that differential lowers around the world. All that said, though, there is very substantial uncertainty surrounding the Fed’s actions, and either move – 25 or 50 basis points – this week promises lots of volatility and big Dollar moves through the second half of the week.
What to Watch Today…
- FOMC Interest Rate Decision, Wednesday 2 PM
- Bank of England Interest Rate Decision, Thursday
- Bank of Japan Meeting, Friday
- Monex USA Online is always open.
GBP ⇑
Pound Sterling moved dramatically stronger against the Dollar this morning, up more than half a percent in Asian and European trading. Central banks are, once again, the name of the game this week, and as traders pile into bets on easing from the Fed, they are at the same time pulling back on easing expectations from the Bank of England, now seeing just a 25% chance of a cut this week. Markets are expecting the BoE will need to wait to see the first budget from the new Labour Party government before making any further moves on easing, and holding interest rates steady would bring the UK’s target rate either flat or above the US’, depending on the size of the move from the Fed.
JPY ⇑
Relative interest rate plays are driving pricing all across the G10 board, and as traders lean toward the possibility of supersized easing from the Fed, the Japanese Yen has been quite the beneficiary. JPY has strengthened a further two-thirds of a percent against USD from Friday’s close and has now been hovering around its strongest point since July of 2023. The Bank of Japan has kept the door open for further interest rate hikes this year, which would move both against the Fed and the larger global consensus on an easing cycle rather than tightening.
