What will today’s Fed meeting mean for the US Dollar?

ollowing a downturn in global economic data and heightened concerns regarding an escalation in the US-China trade war, expectations for a dovish FOMC are sky-high going into today’s meeting. Investors have rushed to price in aggressive policy easing from the Fed ever since FOMC Chair Jerome Powell stated earlier this month that the bank would ‘act as appropriate’ to maintain the pace of expansion.

The key to the reaction in the US Dollar this evening will be whether Powell reinforces these dovish comments with concrete hints that interest rate cuts could be imminent. Markets will also be paying close attention to the bank’s updated ‘dot plot’ for an indication as to the appetite for rate cuts among the rate-setting committee. Should we see a handful of members supporting a cut, we could see a sharp knee-jerk sell-off in the US Dollar.

If, however, the ‘dot plot’ is largely unchanged and Powell continues to talk up the solid economic performance in the US, we could see EUR/USD make a fresh march towards the 1.11 mark. Our base case still remains for stable policy from the Fed this year, although tonight’s announcement could significantly alter this view.

Euro nurses losses after dovish Draghi speech

The Euro was left reeling by ECB President Draghi’s far more dovish than expected comments yesterday that kept the door ajar to additional easing from the central bank. In stating that the bank would consider policy changes to support the Eurozone economy in the coming months, Draghi ignited a flurry of bets in favour of rate cuts, with the market quickly pricing in excess of an 80% probability of a rate cut before the end of the year.

The reaction in the Euro was actually fairly muted considering, with the common currency only shedding around half a percent of its value against the USD. This can largely be attributed to the lack of willingness among investors to commit to significant positions either way ahead of tonight’s Fed meeting. Draghi will be speaking again today, although additional comments on monetary policy are likely to be limited.

Johnson wins second vote to be PM

With central bank decisions making taking centre stage this week, news on Brexit has gone a little under the radar. This may be due to the fact that the ongoing Tory leadership contest is turning into a foregone conclusion. Boris Johnson again came out comfortably on top of the second vote among Tory MPs yesterday. It would now take something highly unexpected for him not to be confirmed as the next PM in July.

In the meantime, investors will be eagerly awaiting tomorrow’s Bank of England announcement. We expect the bank to mostly stick to the script and state that it will be closely monitoring the Brexit situation before it decides on its next policy move.