The Market March
The wait is over. In their much-awaited September monetary policy decision, the Fed has opted for a 50-basis point (0.5%) cut to benchmark interest rates in the USA. Even with the hindsight of the Fed’s explanation for its decision and the comments that accompanied the publication, it is hard to feel the Fed was not heavily influenced by market pricing. It made little reference for example to the stronger than expected publications of growth and inflation data in August. One major risk of gratifying market pricing may prove to be that its policy projections continue and may increasingly diverge from market pricing with markets receiving evidence it can march the Fed along to its beat.
What was clear is that US monetary officials have concerns for the ability for US growth to continue to outperform if rates are held in excessively restrictive territory. Perhaps due to limited hard data to support this view, it was clear that bank and credit activity from the Fed’s panel of banks was influential upon its impression of stagnating economic activity. The Fed’s beige book publications are therefore a good starting point for those looking to understand more about the logic behind the Fed’s concern to avoid a future recession.
Despite relative stagnation within EURUSD, a USD move was apparent within the market. USDJPY remains the best barometer for such moves due to its sensitivity to Treasury rates. However, those high beta currencies that would be expected to outperform during such events, including NOK, NZD and CAD, did just that. The market is turning increasingly bearish on the Dollar. The saturation of market shorts however likely remains limited meaning that there is a high probability that barring any data surprises this bout of USD weakness has further to play out.
Discussion and Analysis by Charles Porter
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