The biggest risk event of the day is the upcoming FOMC statement. The Federal Reserve will announce its monetary policy decision later today and the expectations are that the Fed is going to cut the interest rate by 25 basis points. This will be the second interest rate cut by the Fed during this year.
The Dollar Maintained Its Strength
Despite this, the dollar index is still trading strong today and it is up nearly 2.47 percent from its recent low of 95.84 (formed back in June). The dollar-yen pair is on track for its 8th-consecutive day of gains, up nearly 3.824 percent from its recent low of 104.46 (formed back in August).
Remember, this particular pair is of great interest among traders who like to speculate in terms of monetary policy. The strength in the dollar-yen pair confirms that traders have fully priced in a quarter point cut by the Fed. So, if the Fed only delivers this, 25 basis points interest rate cut, there would be hardly any element of surprise in the FX market.
Mixed Economic Data
Generally speaking, whenever there is an anticipation of interest rate cut, it usually drives the currency lower. However, in this new era of central banks, monetary policies aren’t that simple. The U.S. economic data has given mixed signals to the Fed; consumer spending and retail sales growth, a true reflection of consumer sentiment, have soured. On the other hand, there are signs of life in the manufacturing activity and in labour market. Hence, the overall picture supports the Fed’s decision of cutting interest rates.
The Reluctant Fed
The real question is if we are going to see another interest rate cut by the Fed in 2019 and this is where the majority of the focus is going to be among traders. The fact is that businesses are still optimistic and the reason I’m saying this his because we have seen a surge in workers’ pay (according to Beige Book and also average earning for the month of August soared to 0.4% from July reading of 0.3%), and this is in the midst of trade war. This leads us to believe that Federal Reserve may be somewhat reluctant to pull the trigger again for another interest rate cut during 2019.
Unleashing The Twitter storm
The reluctancy on the Fed side brews another major problem- the narrative of Donald Trump. The current stance of the President of the United States is to make the interest rates more competitive among other central banks. Hence, no matter what The Federal Reserve does today in the meeting, they will be a well short of President Trump’s expectations. The President wants the interest rate to be at zero or sub-zero.
To conclude, if the statement by the chairman of the Federal Reserve is more heavy with doubts for dovish measures, it would unleash a Twitter storm by the president. The reality is presidents tweet are powerful and traders do pay close attention to them. This means we may see an initial surge in the dollar index on the back of the Fed decision, but following the twitter storm by the president, the profit taking phenomena could be much quicker.