Dollar drops after Fed cuts rates by 50bp
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Daily Currency Update
The US Federal Reserve cut interest rates for the first time since March 2020 last night taking them from 5.5% to 5.0%. The Federal Open Market Committee decided to kick start this easing cycle with a jumbo 50bp cut rather than 25bp it usually favours when adjusting policy. The accompanying economic projections and statement indicated the Fed would be lowering rates another 50bp this year and by 100bp next year. Markets were divided over what size cut would be unveiled and the confirmation saw the dollar fall across the board. In Fed Chairman Jay Powell’s press conference shortly after the decision, he acknowledged there had been a softening in the jobs market however the economy was still on a solid footing. There was some volatility in the hours after the move which saw the dollar recoup these losses however there has been another sell off as Asia and Europe have come online.Stock markets have welcomed the move with all major indexes higher to the dollar's detriment. EUR/USD hovered around 1.1125 before the announcement and peaked around 1.1190 in the immediate aftermath of the decision before dropping as low as 1.1070 before rallying again. The pair is now around 1.1150. These swings were mirrored in GBP/USD which is now around 1.3255 this morning.
Key Movers
Attention now turns to the Bank of England (BoE) who will be confirming their interest rate decision at midday. The consensus is that the Bank will hold rates at 5% and instead look to cut again in November. Over the summer, BoE Governor Andrew Bailey warned of persistent service sector inflation and that he was wary of moving too soon. That said, the Bank does have a history of not doing what markets expect - at the beginning of the last tightening cycle, the bank raised rates and then held them when the opposite was predicted. The rate cut in August was also a close call amongst decision makers, so it wouldn’t be a complete surprise if the bank lowered policy by 25bp, especially in light of the Feds move last night. There should be some sterling volatility whatever happens in the aftermath of the decision. GBP/EUR is currently back up to 1.1880 this morning.Expected Ranges
- GBP/USD: 1.3155 - 1.3305 ▲
- GBP/EUR: 1.1775 - 1.1950 ▲
- GBP/AUD: 1.9340 - 1.9555 ▼
- EUR/USD: 1.1080 - 4.12 ▲