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U.S. Rate Cuts Are Coming, So What Happened To The Greenback?

By Kathy LienJun 19, 2019 04:46PM ET
www.investing.com/analysis/fed-rate-cuts-are-coming-so-why-didnt-the-dollar-crash-200433040
U.S. Rate Cuts Are Coming, So What Happened To The Greenback?
By Kathy Lien   |  Jun 19, 2019 04:46PM ET
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Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup June 19, 2019

Regardless of how the U.S. dollar reacted to the Federal Reserve’s monetary policy announcement, the main takeaway is that lower interests rates are coming. Instead of talking about the possibility of rate cuts, the conversation has shifted completely to the speed of easing. Back in March, 2 members favored a rate hike in 2019 and 11 favored no change. Now, only 1 member favors a rate hike while 8 see rate cuts in 2019. The worst part for the dollar is that 7 of those 8 members see the need for 2 rounds of easing. St Louis Fed President Bullard wanted interest rates to be lowered by 25bp Wednesday.

So we did not even need to hear from Federal Chairman Powell to understand how dovish the central bank has become over the past 3 months because the dot plot alone speaks volumes about how dramatically sentiment inside the Fed changed. Inflation is easing and uncertainty is rising while business investment is slowing. Even though the Fed upgraded its 2019 GDP forecast and lowered its unemployment rate projections, its next move should be a rate cut and not a hike. The Fed also removed the word “patient” from the FOMC statement, which was originally expected to be hawkish, but now it’s seen as a sign that it won’t wait long before easing. Yet Federal Reserve Chairman Powell still put on a brave face and described the labor market as strong and said incoming data is good, especially on the consumer level. However it won’t take much to tip that group over the edge. According to Powell, they “expect to learn a lot more about the risks in the near term” and if data or the risk picture worsens, There's enough support within the central bank to ease quickly.

In A Nutshell, 6 Things To Know About Wednesday’s Fed Meeting:

  1. Fed leaves interest rates unchanged and drops the word “patient” from policy statement
  2. For the first time, Dot Plot signals interest rate cut – 8 out of 17 members see rate cut this year (7 of those favor 2 rate cuts)
  3. Fed is worried that inflation, manufacturing activity, trade and business investment will fall further
  4. Lowers inflation projections, upgrades GDP and unemployment rate forecast
  5. Job creation and consumer spending won’t be enough to offset downside risks
  6. But Fed wants to see more and it expects to learn a lot more from incoming data and risk picture in the near term

The U.S. dollar fell across the board after the FOMC statement and dot-plot forecast were released but failed to extend lower on the back of Powell’s comments because the Fed chair downplayed the urgency to ease. He made it clear that they are in wait-and-see mode but at the end of the day, all of the changes to the FOMC statement is negative for the dollar. The Fed may be waiting for more data before lowering interest rates but it won’t take much to push them into action – one or two months of disappointing CPI or NFP numbers will be enough. We believe that the dollar should be headed lower against the JPY, CHF and CAD but losses against EUR, AUD and NZD should be limited by the dovish bias of those central banks.

The action continues with the Bank of England’s monetary policy announcement Thursday. Unlike the ECB or other major central banks, recent comments from Bank of England officials cannot be described as dovish. Everyone is worried about a no-deal Brexit but a number of policymakers including Deputy Governor Broadbent and policymaker Saunders feel that rates may have to rise faster than the market expects. This is a view also shared in the past by Governor Carney because the central bank’s base case (and ours as well) is for a smooth Brexit. According to the table below, there hasn’t been any clear direction in the economy since the policy meeting. If the emphasis is on rate hikes, sterling could hit 1.28 versus the dollar and .88 cents versus euro. However if the bank follows in the Fed’s footsteps and raises the possibility of easing, GBP should fall to fresh year-to-date lows against both currencies.

GBP Data Points
GBP Data Points

U.S. Rate Cuts Are Coming, So What Happened To The Greenback?
 
U.S. Rate Cuts Are Coming, So What Happened To The Greenback?

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Vu Hung
Vu Hung Jun 21, 2019 10:12AM ET
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Jút a great FOMO news, yep, rate cut, not year, event not in next year. USD will fly soon
Douglas Brown
Douglas Brown Jun 20, 2019 7:58PM ET
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Your articles are always clea r, well reasoned and logically understandable. I look for your input first...thankyou!!!
Maruping Molotsi
Maruping Molotsi Jun 20, 2019 7:00PM ET
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thank you Kathy...
David Oirere
David Oirere Jun 20, 2019 8:24AM ET
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Thanks Cathy
Amir Qureshi
Amir Qureshi Jun 20, 2019 1:49AM ET
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Your articles are mostly comprised of long stories, not specific and never give any clue. There is only one man who gives specific and accurate analysis. What he predicts definitely happens. His articles are usually not more than 10 lines. I trust him.
Mbongeni Nzuza
AMGThang Jun 20, 2019 1:49AM ET
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Don't hate, Kathy is the best... Who's your guy. He doesn't compare to this
Salazar Salazar
Salazar Salazar Jun 20, 2019 1:49AM ET
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Stop complaining and learn more on how to make analysis on yourselvesThey wasnt born to give you clue or hintThey just analysist not MM
Faez Hj.Baharum
Faez Hj.Baharum Jun 20, 2019 12:44AM ET
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Thanks.. Good and helpfull Analysis for traders..
Jude Especkerman
Jude Especkerman Jun 19, 2019 11:30PM ET
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Thanks Kathy. As usual very detail and helpfull analysis
Beast Mode
Beast Mode Jun 19, 2019 10:50PM ET
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As Draghi said the markets just need longer time to figure out the Central banks actual decision. A lot of algos, speculation and jumping to conclusions when the actual decision is being ignored.
Joe Tan
Joe Tan Jun 19, 2019 10:43PM ET
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Medium term trading, it is hard to see the EUR scaling up against Draghi’s pessimism. FED will cut rates is the trades war betw US and China escalates and so will Draghi as the trades war will affects the EUR zone too. So would you hold EUR over the medium term until FED decides ti cut rates amid the high overnight rollover interest?
Partap Singh
Partap Singh Jun 19, 2019 9:22PM ET
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dollar index fell but why USD INR is dropped, thank you Kathy for analysis
Matt luck
Matt luck Jun 19, 2019 7:19PM ET
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Good thing Trump gave billionaires a huge tax subsidy so as usual they hoard more cash as real economy goes to pot.
Matt luck
Matt luck Jun 19, 2019 7:19PM ET
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Want to add, great article. The fed has ridiculous power. Careful wording, statistics, facts, he is acting in best interest of an all powerful legitimate fed with privately held legalized issuing power, it is financial weapon could say!
Chris Poulos
Chris Poulos Jun 19, 2019 7:05PM ET
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you say that 8 of the 17 members see a rate cut coming this year. could you clarify that please? do all 17 members have a vote? if not which ones are voting members? and is it a simple majority vote? if 8 members see a rate cut coming that means that 9 do not. would those 9 out vote the other 8? any additional information would be much appreciated!!
sylvester aigbedion
sylvester aigbedion Jun 19, 2019 6:11PM ET
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Thanks for this assessment
Ephraim Gbordzor
Ephraim Gbordzor Jun 19, 2019 6:04PM ET
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Awesome assessment
Ephraim Gbordzor
Ephraim Gbordzor Jun 19, 2019 6:04PM ET
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It'll be interesting to see how it's gonna affect the EURUSD! Maybe we'll now have some meaningful direction from this pair
John Ervin
Johnie Jun 19, 2019 5:40PM ET
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lol
 
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