Fed cuts rate again but why is the dollar gaining?

As expected the Federal Reserve has cut the Fed Funds range by -25 basis to 1.50%/1.75%. However, this move was all but fully priced moving into the announcement. The key to the next move lies with forward guidance. It seems that the Fed has move to more of a wait and see approach. It also seems that Jerome Powell has moved markets.

A third rate cut in as many meetings certainly asks questions about whether this is more than a “mid-cycle adjustment”. Today’s cut suggests that the Fed is now on pause at least. This position has been reiterated by chair Powell and suggests that this is a mild hawkish surprise.

FOMC Statement changes

Aside from the part that says business investment and exports “remain weak”, there was only one really significant change to the statement. No longer will it “act as appropriate” but now it will “assess the appropriate path of the target rate.

Dissenting voices – Bullard re-joins the pack

This is an important shift. The two hawks, Esther George and Eric Rosengren continue to dissent to the cuts, but Bullard seems happy with the move.  We will have to wait for a speech by Bullard or the Fed minutes to perhaps add meat to the bones but this is an important shift away from a continued cycle of easing.

What are the prospects for future rate hikes?

This afternoon markets were struggling to price in another cut for the coming meetings. According to CME Group FedWatch, the market is not pricing a further cut of over 50% probability until March/April 2020. In the immediate wake of the cut today, there has been a slight hawkish shift in future positioning. It now goes out to the June 2020 meeting before the probability is over 50% for the next cut.

Powell’s press conference

Fed chair Powell seems to be presenting as having a more “appropriate” position. This is a slight hawkish surprise.

• “policy is not on a pre-set course”
• “monetary policy is in a good place now”

Market Impact

Was a very muted move across major markets until Powell started talking. His slightly more hawkish lean than previous, suggests the Fed is now comfortable with the new level. This suggests that they are on pause.

There has been a minor move across Treasuries, whilst the dollar has begun to gain ground again. The biggest move has been seen as gold has slipped decisively lower.

• Treasury yields have shown a mild curve flattening as the shorter end of the curve has risen whilst the longer end is all but steady.
• EUR/USD – traded initially higher but now decisively lower on Powell. A test of $1.1060/$1.1075 support is again being seen. A close below would be dollar positive.
• GBP/USD – an initial +20 pips move subsequently dropped -40 pips back. Powell has been the story here.
• USD/JPY – a dollar positive move of +40 pips and the market has broken out above 109.00. A losing breakout is a key move.
• Gold – gold has fallen around -$10 and the support of $1480 comes back into sight.
• S&P 500 – all but flat and around where it was prior to the Fed.