In line with consensus expectations, the FOMC voted this morning to keep the federal fund's target range steady at 2.25%-2.50% and opened the door for a rate cut at its next meeting on the 31st of July. Notably, the tone of the accompanying statement and press conference exceeded even the most dovish expectations.
The key elements of the statement included the description of growth being downgraded from solid to moderate. The outlook for future policy, formerly described as one of “patience” was replaced with a need to “closely monitor the implications of incoming information for the economic outlook” and to “act as appropriate to sustain the expansion”.
The vote to keep rates on hold also had a dovish tilt. St Louis Fed President Governor Bullard voted for an immediate rate cut, prompting some wags to suggest that Bullard is after Fed Chairman Powell’s job as rumours continue to circulate about President Trump's unhappiness with Chairman Powell.
Importantly, Powell opened the door to a 50bp cut at the next meeting “an ounce of prevention is worth a pound of cure”.
Economists at U.S. investment bank Morgan Stanley are now calling for a 50bp cut in July, delivered with flexible language to allow the Fed to cut again if needed. Pricing for the July meeting now has over 30bp of cuts priced. The possibility of a 50bp cut in July will further support the recent rally in U.S. equities and suppress volatility across the board.
The immediate implications for FX and the U.S. dollar are not entirely clear. FX is a critical lever to pull should the trade war, and tariffs continue, thereby supporting the U.S. dollar. Offsetting this is U.S. interest rates are at a higher level than elsewhere and have more room to fall. The loss of yield support for the U.S. dollar should eventually be telling.
From a technical perspective, the U.S. dollar index, the DXY, remains range bound which presents opportunities for range traders. However, for momentum traders, a break of either the 200-day moving average support near 96.50/40 or resistance from recent highs near 98.40 is needed.
My view is that when the break comes, it will be to the downside. Specifically, should the DXY index break/close below 96.50/40 it will open the way for a deeper pullback towards the Sep 2018 low, at 93.81.
Source Tradingview. The figures stated are as of the 20th of June 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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