The United States Dollar is on the back foot this morning after the FOMC’s supersized interest rate cut yesterday, though not necessarily to the extent that some might expect after an outsized action.
Overview
The story for USD is not all negative, and after initially dropping like a stone following the announcement from the Federal Reserve, the Buck managed to claw back much of its initial losses. The Bloomberg Dollar Spot Index closed yesterday nearly flat on the session, and though trading in the red this morning, some moves could be considered muted, and the Dollar isn’t losing ground across the entire G10 today.
A fifty basis point interest rate cut is a bit of a shock to the system, sure, but Powell’s press conference after the decision did much to assuage market fears that the US economic situation may be worse than previously thought. Powell addressed the move as a ‘recalibration’ and reiterated several times that the health of the US economy is good and the Fed intends to keep it that way. He was very firm in his support for the US labor market and avoided a pessimistic take that could have driven the USD further down, instead choosing to highlight the positives of the decision. Of note, of course, is the newest update to the Fed’s dot plot, which puts the median forecast of voting members at 50 further points of easing this year. There were, notably, several FOMC members that only saw 25 further points this year. Market expectations currently sit at 75 basis points of easing in the next two meetings, which would require one further 50 basis point cut. This was clearly a close decision, as Michelle Bowman marked down the first dissent from a Fed governor since 2005. The Fed’s decision yesterday will likely prove to provide continuing support for the labor market, and data-dependence moving forward will keep traders guessing through the remainder of this year. As the dust settles, we expect the FOMC will ease less in its remaining two meetings than markets at large, but the door is open for two further 25 basis point cuts if employment surveys continue to be lackluster.
Unemployment data this morning, as well, helped markets retain their rosy tinge, as both initial and continuing jobless claims came in under expectations. Risk assets are cheering the decision, as US equities open quite a bit higher and traditional haven currencies like Swiss Franc lose ground. EM assets, too, are climbing after the decision.
What to Watch Today…
- Bank of Japan Meeting, Friday
- Monex USA Online is always open.
GBP ⇑
Pound Sterling, after initially touching a 2.5-year high against USD following the FOMC’s decision to cut interest rates yesterday, has retraced most of its gains but is still trading roughly half a percent stronger this week. The Bank of England, for its part, held interest rates in the UK steady this morning and issued a surprisingly hawkish statement on the decision, perhaps impacted by Powell’s rather hawkish statement yesterday afternoon. The BoE’s decision was made in an 8-1 vote, suggesting that policymakers are largely committed to remaining at least somewhat restrictive to ensure inflation returns to acceptable levels, though a ‘gradual approach to removing policy restraint’ is merited.
JPY ⇓
Japanese Yen, ahead of the Bank of Japan’s own interest rate decision overnight tonight, initially swung more than a percent stronger against the USD but is now nearly a percent weaker versus the Buck on the week as traders digested the FOMC’s decision and Powell’s subsequent press conference. As JPY is a more traditional haven currency, Powell’s emphasis that the US economy is in a good place did not do the pair any favors. The Fed did seem to signal that the pace of its interest rate cuts is likely to be slow after yesterday’s jump start, and as the BoJ is unlikely to take any action on rates at this meeting, investors are still looking for more of a change in rate differentials between the two nations.
