Fed cutting remains the focus

Central banks were squarely in focus for traders this week, none more so than the Fed, where the FOMC surprised markets by kicking off their easing cycle with a 50bp rate cut. However, set against a dot plot indicating a shallower easing path than swap markets had forecast, this saw only a limited selloff for the greenback. As we noted in response to Wednesday’s decision, this looks like the Fed correcting a mistake made in July, when the FOMC failed to lower rates. As such, we are inclined to take at face value, Chair Powell’s insistence that the Fed is in no rush to cut going forward. If we are right, then the greenback should trade stronger in the coming weeks as US rate expectations grind higher, all else being equal. In contrast, other central bank meetings this week were much less dramatic. The BoE, BoJ and Norges Bank all left rates unchanged, while the BCB hiked, though not unexpectedly given an uptick in inflation pressures.

Next week is set to be another busy week on the monetary policy front too. Rate decisions are expected from the Riksbank, the SNB, and Banxico, with cuts likely across the board. Elsewhere, PMIs are likely to be a point of interest for euro traders, especially after last month’s readings were distorted by the impact of the Paris Olympics. But we suspect that it will be the Fed’s easing path that continues to be the dominant catalyst for FX price action. With markets still assessing the fallout from this week’s events, the raft of Fed speakers post-blackout will be key for steering market expectations, and the dollar.

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Authors: 

Nick Rees, Senior FX Market Analyst

María Marcos, FX Market Analyst

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