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At the height of the panic last Tuesday, futures were pricing in another 50bp cut by the Federal Reserve on January 30. Since then, cooler heads have prevailed and expectations have been ratcheted down to 25bp. We believe the consensus view is correct and the Fed will cut 25bp at most, preferring to save its ammunition for another day. Nevertheless, if the Fed lowers 25bp that will mean that US rates have declined by 100bp in just one month, a factor that should weigh on the greenback over the long run. On the positive side, however, is an expected jump in NFP numbers. If that data surprises to the upside, some of the doom and gloom talk may ease providing the greenback with a lift as recessionary fears recede for the time being.
Bewildering. That’s about the only way to describe the price action in currencies this week as EURUSD first plunged to 1.4360 only to rise in a near vertical fashion to 1.4770 by early European trade on Friday. For the week the dollar gave back 100 points, but the placid end result hid the heart stopping price action in between. What happened? Global equity markets cratered over the MLK holiday. Thus, confronted with a very real possibility of -1000 Dow day, the Fed decided to do something extraordinary, an inter meeting 75bp cut. The amplitude of easing was stunning. Only once in the past 25 years has the Fed cut by as much as 75bp and that was during the 1980’s when interest rates were at double digit levels.
In the near term the move assuaged the markets as equities stabilized and Dow put in a 600 point recovery on Wednesday. The turnaround in equities was a dose of confidence for the currency markets and carry trades zoomed to the upside. EURJPY rose four big figures in one day taking the EURUSD along for a ride. But, like a junkie looking for the next high, the markets want more and next week all eyes will be on the FOMC meeting as equities seek further easing.
At the height of the panic last Tuesday, futures were pricing in another 50bp cut on January 30. Since then, cooler heads have prevailed and expectations have been ratcheted down to 25bp. We believe the consensus view is correct and the Fed will cut 25bp at most preferring to save its ammunition for another day. Nevertheless, if the Fed lowers 25bp that will mean the US rates have declined by 100bp in just one month, a factor that should weigh on the greenback over the long run. On the positive side however, is an expected jump in NFP numbers. If that data surprises to the upside, some of the doom and gloom talk may ease providing the greenback with a lift as recessionary fears recede for the time being.
Visit our recently updated EUR/USD Currency Room for more resources dedicated to the US Dollar. - Original written by Boris Schlossberg, Senior Currency Strategist at DailyFX
Bewildering. That’s about the only way to describe the price action in currencies this week as EURUSD first plunged to 1.4360 only to rise in a near vertical fashion to 1.4770 by early European trade on Friday. For the week the dollar gave back 100 points, but the placid end result hid the heart stopping price action in between. What happened? Global equity markets cratered over the MLK holiday. Thus, confronted with a very real possibility of -1000 Dow day, the Fed decided to do something extraordinary, an inter meeting 75bp cut. The amplitude of easing was stunning. Only once in the past 25 years has the Fed cut by as much as 75bp and that was during the 1980’s when interest rates were at double digit levels.
In the near term the move assuaged the markets as equities stabilized and Dow put in a 600 point recovery on Wednesday. The turnaround in equities was a dose of confidence for the currency markets and carry trades zoomed to the upside. EURJPY rose four big figures in one day taking the EURUSD along for a ride. But, like a junkie looking for the next high, the markets want more and next week all eyes will be on the FOMC meeting as equities seek further easing.
At the height of the panic last Tuesday, futures were pricing in another 50bp cut on January 30. Since then, cooler heads have prevailed and expectations have been ratcheted down to 25bp. We believe the consensus view is correct and the Fed will cut 25bp at most preferring to save its ammunition for another day. Nevertheless, if the Fed lowers 25bp that will mean the US rates have declined by 100bp in just one month, a factor that should weigh on the greenback over the long run. On the positive side however, is an expected jump in NFP numbers. If that data surprises to the upside, some of the doom and gloom talk may ease providing the greenback with a lift as recessionary fears recede for the time being.
Visit our recently updated EUR/USD Currency Room for more resources dedicated to the US Dollar. - Original written by Boris Schlossberg, Senior Currency Strategist at DailyFX
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