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20.09.201901:32 The dollar is trying to unravel the Fed's plans

Long-term review

Exchange Rates 20.09.2019 analysis

The central event of this week - the next meeting of the Federal Reserve - did not bring clarity. Analysts continue to wonder what to expect from the regulator in the future.

However, unlike US President Donald Trump, who called Fed Chairman Jerome Powell "a terrible communicator," financial markets seem to have clearly understood the hints of the latter. The Federal Reserve chief's statement that the central bank is ready to aggressively reduce the interest rate in the event of a deterioration in the well-being of the US economy, caused the S&P 500 to grow most rapidly over the past six weeks. Prior to that, the index dipped under the influence of the regulator's rate forecasts: 7 out of 17 FOMC members believe that it should be reduced by 25 basis points by the end of the year, 5 believe that it will remain unchanged, and 5 would like to see not one, but two acts of monetary expansion. Apparently, investors were frightened not by the easing of the Fed's monetary policy (of which I have been certain for a long time already), but by the fact that the rate on federal funds is likely to remain at 1.75% until the end of next year.

Of course, you can talk for a long time about what affected the split in the ranks of the FOMC (3 out of 10 Committee members voted against lowering the interest rate from 2.25% to 2%), but when so much uncertainty is observed on the market, pluralism of opinions is inevitable. Experts call the current situation as "Powell's puzzle": the Fed is forced to balance between strong macro statistics in the United States, which allowed it to increase the country's GDP for the current year from 2.1% to 2.2%, and international threats, including trade conflicts and Brexit.

The mixed reaction of the markets and the lack of a clear signal from the Fed about the weakening of monetary policy in 2019 caused another bout of anger from the head of the White House, Donald Trump.

"Jay Powell and the Federal Reserve Fail Again. No "guts", no sense, no vision! A terrible communicator!", D. Trump wrote on Twitter.

Although the Fed chairman prefers to ignore such attacks against him, this time he commented on the idea of negative interest rates called for by the US president. According to J. Powell, if the situation begins to deteriorate, then the central bank will revive QE rather than lower the federal funds rate below zero.

The day before, the greenback slightly strengthened across the entire spectrum following the results of the September FOMC meeting, but today it is gradually losing ground, since the Fed still does not have a consensus on further actions to adjust the monetary rate.

The market is not completely sure how the US central bank will behave. Most analysts expect the regulator to further trim the rate on federal funds this year, but only one reduction is laid.

Probably, investors will wait for some new signals. In recent days, the trade war between the US and China has left the information field. If another escalation of the conflict occurs, the market may perceive this as a signal for more active easing of the monetary policy of the Federal Reserve.

"It is obvious that the Fed does not have a consensus on what to do next: on the one hand, D. Trump presses, blaming the central bank leadership for incompetence and demanding an urgent interest rate cut to zero or lower, on the other, there are no formal reasons for this," he said ING chief economist James Niley.

Valentin Marinov, Head of Currency Research at Credit Agricole, calls the FOMC decision to trim rates as "hawkish" cuts, believing that such a move is positive for the greenback.

"I believe that currencies that are more closely correlated with investor sentiment regarding risky assets will be more vulnerable to the dollar than the euro, yen and gold," he said.

"I think the Fed will succeed if it can slightly weaken the dollar's position, and make the curve of its fall rate a little steeper. Markets have already shown the expectation of another cut in the base interest rate in December, "said Jim Caron of Morgan Stanley.

Uitgevoerd door Viktor Isakov,
Analytische expert
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