Dollar recovers some ground post-Fed
The Fed cut by 25bps yesterday as expected, lowering the policy rate to 4%-4.25%, and ‘guided’ another 50bps reduction (to 3.5%-3.75%) by the end of this year and a further 25bps (to 3.25%-3.5%) by end-2026, a bit less than the market had been pricing in before the meeting. Trump’s newly-installed appointee, Steve Miran, voted for a 50bps cut and believes rates should be lowered to 2.75%-3% by end-2025, which is likely to add to concerns about the ‘politicisation’ of the Fed. The dollar fell briefly following the rate decision before regaining some ground. EURUSD and GBPUSD are trading at about $1.1820 and $1.3620 respectively this morning, down from highs of around $1.1920 and $1.3725 immediately following the rate announcement (and a bit below Tuesday’s closing levels of $1.1870 and $1.3650), while EURGBP is largely unchanged at £0.8680. Meanwhile, the Bank of England MPC announces its latest monetary policy decision at noon today, with interest rates widely expected to be left unchanged at 4%.
US bond yields fell initially following the Fed rate cut before spiking higher into the New York close. Both 2-and 10-year yields ended around 5bps higher on the day, though they have come back a bit again in overnight trading in Asia. German and UK yields had earlier finished flat to marginally lower. In equity markets, European stocks were largely unchanged on the day, while the S&P 500 closed broadly flat post-Fed.
In its post-meeting monetary policy statement, the Fed said “recent indicators suggest that growth of economic activity moderated in the first half of the year…job gains have slowed (and) the unemployment rate has edged up but remains low (while) inflation has moved up and remains somewhat elevated.” It also noted that “downside risks to employment have risen”, hence the decision to resume lowering rates at yesterday’s meeting.
The Bank of England MPC is widely expected to keep interest rates unchanged at 4% today. Following last month’s meeting, BoE Governor Andrew Bailey said upside risks to inflation had increased “slightly” and, therefore, while the direction for rates was still “downward”, there was greater “uncertainty” about the timing and extent of future rate reductions. The market has pushed out the date for the next cut in rates to around March-May next year, while it will be watching closely to see how many, if any, MPC members dissent in favour of a cut today.
The economic data calendar is sparse enough today. The regular weekly jobless claims release is due in the US, while construction output is scheduled in the Euro area.