The US dollar remains king as market participants conclude that the Fed will not embark on an interest rate cutting cycle.
Last night’s announcement proved the Fed may have a communication problem as the market perceived them to be far more dovish than they turned out to be. The US central bank lowered interest rates by 0.25% but offered the impression there would not be a string of rate cuts to follow. Jay Powell even confessed this move was also taken for insurance policies. Essentially, the Federal Reserve are a little nervous about various global events; with little domestic inflation present, they saw minimal harm in providing stimulus to the US economy to maintain its respectable level of growth.
It’s unlikely the Fed continue to lower interest rates. There might be one more decrease later this year but ultimately the US economy is in a favourable position. In addition, there were two dissenters to this latest policy move, this indicates that it will be hard to form consensus on the committee to once again lower rates in the short-term, unless there’s an unexpected shock to the system.
The greenback surged during the announcement, gaining over 1 cent against the pound from before the event begun. This has continued overnight with the GBPUSD rate resting just above the $1.21 level. Those hoping for a more dollar-negative reaction will be sorely disappointed and should be aware that the buck may have further ground to gain!
Today is all about the Bank of England policy announcement and inflation report. To back this up we’ll have another round of global PMIs as it’s the 1st of the month. It should be a volatile day as we fast approach tomorrow’s all-important US jobs report. Keep your seat belts buckled…!
Written by Viv Savani. 8:59am, August 1st 2019
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