In recent days, the US dollar has strengthened in relation to other major currencies, and the dollar index is approaching the two-year highs again. You could say that the American currency is also strong because the other currencies are simply even weaker.
The market expects interest rate cuts in the United States, but similar expectations are also directed towards the European Central Bank, the Australian RBA, the New Zealand RBNZ, which may affect the weakness of EUR, AUD and NZD. The pound, in turn, seems to be falling by growing worries about hard brexit. In this situation, investors seem to choose the dollar as the main currency of the world, because the other currencies seem to be unattractive. So let's look at the expectations of selected financial institutions before the Wednesday decision of the Federal Open Market Committee, what are the expectations of investors and how this may affect the dollar.
The interest rate market with 75-percent probability expects a 25 basis point cut and with 25 percent probability cut of 50 basis points. Looking further, the market expects three interest rate cuts by January and four cuts by the end of 2020.
In the opinion of Capital Economics, the market may be disappointed with the Fed's decision, as it was disappointed with the decision of the ECB last week. The reaction may be particularly important if at least one or more of the hawks in the FOMC do not agree with the rate cut. If the US data will not improve, that may put Fed under more criticism.
According to Deutsche Bank, a quarter-percent cut with maintaining a dovish bias may not be enough to keep the markets calm. However, if the Fed announces that further interest rate cuts will depend on economic data, this may be perceived as a more hawkish statement.
JPMorgan writes that the July statement will not change in relation to June – Fed will leave hints on further monitoring of economic data and will consequently act accordingly. Jerome Powell, Chairman of the Federal Reserve, may in turn declare that the dependence on data will be greater than in June.
It seems, therefore, that cutting by 25 basis points and leaving dependence on economic data is a scenario that can support the US dollar. On the other hand, a 25-point reduction with a dovish attitude towards the future may be neutral for the dollar with slight weakening and a cut of 50 basis points, this could be a scenario with a strong drop in the dollar. FOMC decision on Wednesday at 20.00.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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