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Why Is The Dollar So Strong Ahead Of A Rate Cut?

By Kathy LienForexSep 17, 2019 03:28PM ET
www.investing.com/analysis/why-is-the-dollar-so-strong-ahead-of-a-rate-cut-200465482
Why Is The Dollar So Strong Ahead Of A Rate Cut?
By Kathy Lien   |  Sep 17, 2019 03:28PM ET
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Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup Sept 17, 2019

Tomorrow’s Federal Reserve monetary policy announcement is the biggest event risk of the week and while the central bank is widely expected to lower interest rates for the second time this year, USD/JPY is trading at its strongest level in more than a month. Typically, interest-rate cuts drive currencies lower, but as we saw with last week’s European Central-Bank meeting when the euro bottomed after aggressive monetary easing, it's rarely that simple. Expectations are one of the main reasons why investors are buying USD/JPY ahead of the central-bank meeting. The market has completely discounted a quarter point cut but Chairman Jay Powell may not commit to much more beyond that.

The US economy has seen improvements and deterioration since the July meeting. Retail sales growth slowed, job growth moderated, manufacturing activity eased and consumer sentiment soured. However inflationary pressures have been steady, wage growth quickened and service-sector activity accelerated. Last week’s economic reports also support a more even tone from the Fed after three rate cuts. Job growth slowed in August according to the nonfarm payrolls report but average hourly earnings growth accelerated. Only 130K jobs were created, down from 159K but earnings grew at a 0.4% pace versus 0.3% in July. This was the strongest pace of wage growth in 6 months. According to the Beige Book, businesses are still optimistic though trade uncertainty nags but their concerns have not stopped them from paying their workers more. So while a rate cut this month is a done deal, Powell’s guidance could help, not hurt the dollar.

In fact, everything we heard from Federal Reserve officials suggests that they are reluctant to ease. In our note last week we highlighted all of the comments from Fed Presidents who cast doubt on the need for easing. This hesitance was reaffirmed by FOMC voter Rosengren who said that “no immediate Fed action is needed if data stays on track.” FOMC voter Williams also feels that the baseline for the economy is continuing strong growth and he won’t pre-judge the outcome of the September meeting. Fed President Kaplan agrees that it is important to continue assessing data ahead of FOMC before judging what type of action to take. This contrasts sharply with a market that believes a 25bp rate cut on September 18 is guaranteed and makes us increasingly worried that the market is misjudging the degree of Fed dovishness. The Fed may cut rates in September but even if they lower interest rates, the accompanying statement could be less dovish.

If Powell laces the rate cut with optimism, the biggest beneficiary should be USD/JPY, which will make a break of 109. EUR/USD could also u-turn for a trip back below 1.10. If we are wrong and Powell is unambiguously dovish, leaving the door open for easing in December, USD/JPY will head for a test of 107 but USD/CAD could be the best currency to sell. In addition to the rate decision, the Fed will also be updating their economic projections, which could move the dollar as well.

Why Is The Dollar So Strong Ahead Of A Rate Cut?
 
Why Is The Dollar So Strong Ahead Of A Rate Cut?

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KHALED Muhwezi
KHALED Muhwezi Sep 20, 2019 2:23AM ET
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but your bad wen it comes to analysis
Artour Kassimov
art1997 Sep 18, 2019 2:40PM ET
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It looks like the idea of selling USD.CAD in this article was not correct t least one hour after the Fed statement
Jeremy Stout
Jeremy Stout Sep 18, 2019 2:40PM ET
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The Fed was mixed on future cuts
Cesar Mendez
Cesar Mendez Sep 18, 2019 1:39PM ET
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Thanks.
Nick Roth
Nick Roth Sep 18, 2019 5:55AM ET
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Thank you Kathy.
형빈 전
형빈 전 Sep 18, 2019 3:40AM ET
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every news media say "powell will cut late a little bit".....but there's no news media such "powell will not cut the rate"......It feels like that there's no neutral news. all news want to cut rate.
Partap Singh
Partap Singh Sep 18, 2019 2:35AM ET
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thank you Kathy
Adam Mhlanga
Adam Mhlanga Sep 18, 2019 1:00AM ET
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hi guys is it true that is a done deal that the Fed will cut its rate for the month and will this affect be bad or good for the USA Economy? thank you
Kisakye Ishaaq
Kisakye Ishaaq Sep 18, 2019 12:21AM ET
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oh yes cad has been increasingly bullish since the Boc meeting
Frag Carole
Frag Carole Sep 17, 2019 11:54PM ET
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Why? Because other currencies are in shambles, especially the Euro.
Majors RTM
MRTM Sep 17, 2019 11:54PM ET
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The euro is in an uptrend. It is not about where price has been but where it is going.
an summer
an summer Sep 17, 2019 9:05PM ET
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Thank you Kathy.but less dovish offer stocks fall,and USDJPY decline,I think
Akhil Gaur
Akhil Gaur Sep 17, 2019 8:58PM ET
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Thanks for updating.
Tabaruk Hossain
Tabaruk Hossain Sep 17, 2019 8:25PM ET
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much appreciated!!! Thanks
Uz IL
Uz IL Sep 17, 2019 7:18PM ET
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Thank you Kathy.
Tawanda Silz
Tawanda Silz Sep 17, 2019 7:03PM ET
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Thanx for the update.
Jim Gregory
Jim Gregory Sep 17, 2019 5:39PM ET
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so is there a rate cut or no??
Adam Mhlanga
Adam Mhlanga Sep 17, 2019 5:39PM ET
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wondering too
Kevin McCarthy
Kevin McCarthy Sep 17, 2019 5:34PM ET
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thanks for the update
Oqtay Qadashov
Oqtay Qadashov Sep 17, 2019 5:07PM ET
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Thanks honey
Raoul Duke
Raoul Duke Sep 17, 2019 4:36PM ET
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Good article today.
Paul Kosmata
Paul Kosmata Sep 17, 2019 4:11PM ET
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again, thank you because your writing is clear and to the point. We love it
Thabo Simelane
Thabo Simelane Sep 17, 2019 4:05PM ET
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Many thanks Kathy
juan pena
juan pena Sep 17, 2019 4:04PM ET
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detailed report... thanks
Tumelo Humphrey
Tumelo Humphrey Sep 17, 2019 3:58PM ET
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Thank you Kathy ❤️
Sai Sae
Sai Sae Sep 17, 2019 3:55PM ET
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please provide your insights on Indian stocks...
 
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