The FOMC caught markets off guard on Tuesday with an unexpected inter-meeting 75-basis point rate cut, bringing the Fed Funds rate to 3.5%. In the accompanying statement, the Fed cited “weakening of the economic outlook and increasing downside risks to growth” for the aggressive move. The greenback quickly sold off against the euro and sterling after the announcement and remains weak heading into the Wednesday session.
The Fed’s easing today marks the largest rate cut of this stature since 1982 and first inter-meeting move since the September 11th attacks. The Asian equity bourses took solace in the FOMC’s aggressive action to stave off a US economic recession, with Tokyo’s Nikkei index rallying 3.35% and Hong Kong’s Hang Seng up 7.18% by midday. With the scheduled policy deliberating meeting just a week away, I expect another 50-basis point rate cut when the Fed announces its decision next Wednesday.
FOMC Emergency Rate Cut
USD Drifts Lower, All Eyes on FOMC
The dollar struggled against the euro and sterling at the start of the week, slipping to 1.4735 versus the single currency and 2.0487 against the pound. Sentiment over the direction of global interest rates continue to impact foreign exchange – with the euro benefiting today from hawkish commentary from ECB officials. With inflationary pressure continuing to linger in the Eurozone, members have hinted at the possibility for additional policy tightening down the road.
Market attention remains fixated on the outcome for tomorrow’s FOMC policy meeting, due out at 2:15 PM. Heading into the meeting, expectations for a more aggressive 50-basis point rate cut have been tempered in light of recent economic data, such as the upbeat jobs report from last Friday and the latest reports on inflation. Nonetheless, given uncertainties on the soundness of banks’ balance sheets and tight credit conditions – the Fed may still take extra precaution to ensure stability in the financial markets. Meanwhile, the greenback continues to trade on weaker footing with markets pricing in at least another 25-basis point rate cut tomorrow, lowering its benchmark lending rate to 4.25%.
Dollar Near Fresh Low
Tight range started on the asian session. Most of the big players are waiting for the month much anticipated announcement from the Fed tommorow. Next to focus is the non-farm payroll coming out on the first friday of November which is are expected to slip to 80.0k, versus 110.0k from last September.
The greenback remains under pressure as traders position ahead of this week's closely anticipated FOMC monetary policy setting meeting. Fed funds futures are fully pricing in a 25-basis point rate cut to 4.50%, thereby dragging the dollar to fresh record lows against the euro at 1.4437 and a new multi-decade lows versus the Loonie at 0.9576 and Aussie at 0.9270.
Although the Fed is largely expected to ease by 25-bp, the dollar's direction will likely be dictated by the accompanying FOMC policy statement and whether further easing can be anticipated. We look for the Fed to maintain a largely neutral stance in its policy statement, with an emphasis on the preemptive nature of the cut "to forestall some of the adverse effects on the broader economy", as stated last month.
Dollar fell today
The dollar pared its gains against the euro and sterling as the bearish sentiment over the dollar does not change after Monday's unexpected dollar strength. The euro rebounded back to around 1.4250 versus the dollar, while the sterling passed through 2.05 against the dollar.
The market will focus on US housing data this week and the FOMC next week. US existing home sales due tomorrow is seen to fall from an annual rate of 5.5 million units to 5.25 million in September. Also new home sales will be released on Thursday. The housing slump will continue to weigh on the nation's economy and therefore put pressure on the Fed to cut rates.
Interest rate futures indicate that traders are pricing in a nearly 90 percent chance that the Fed will cut rates by a quarter percentage point to 4.50 percent at its Oct 31 policy meeting.
