Daily Brief – An orderly start

An orderly start

Last night the Fed delivered on the widely expected 25-basis point cut to the Fed funds rate. The governing council presented a surprisingly united front with only one descending vote for an immediate 0.5% cut to benchmark rates. This came from newly appointed Stephen Miran whose name you may recognise from the Mar-a-Lago accord which captivated markets earlier this year. For a central bank that has seen so much turbulence recently, largely as a result of its attempted politicisation, a united front will not go unrecognised. 

Last night’s decision marked the formal shift in the Fed’s attention to the other side of its dual mandate: employment. In order to address a stagnating labour market, the Fed now sees the need for benchmark rates to move lower by some 1% in total to deliver what it forecasts to be a very soft landing indeed. The market isn’t convinced and despite an initial drop lower in yields following the decision, front-end rates and the Dollar immediately started to climb. 

A factor that can’t be ruled out behind the recovery in the Dollar into this morning’s European open is positioning. The Dollar had already weakened to year-to-date lows moving into last night’s decision. A stretch above 1.19 in EURUSD was always likely to be very short lived except for in the case of a more fundamental change to the outlook. There will remain a bias towards a weaker Dollar, but significant further labour market weakness may hold the key for now to unlocking significant further deterioration within the greenback.

Discussion and Analysis by Charles Porter

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