From the moment a press conference is held after each Fed meeting where the chairman can explain the reasons and arguments for the Federal Reserve actions, it's easier to make important decisions. Earlier, when the conference took place every second meeting we have observed usually changes in monetary policy also every second meeting.
Today, the Fed may for the third time in a row decide to lower the federal funds rate from 1.75-2.00 percent to 1.50-1.75 percent. The interest rate market is more than convinced in 96 percent of this cut and as a result, we probably won't be able to talk about the fact that three cuts in a row are just a correction in the monetary policy tightening cycle, as previously announced by the Federal Reserve. However, there are many indications that this may be the last cut this year in the US and then there will be a period of interest rate stabilization. It is priced-in by both the federal fund rate market and a stopped rally in the US bond market, where even double top patterns have appeared.
How can the dollar and currency pairs associated with it react to this decision? Well, because the decision is in more than 90 percent expected by market participants, the expected volatility during today's event may not be huge. In fact, volatility for the major currencies has fallen to its lowest level in three months, as indicated by the JP Morgan G-7 Volatility Index. This index has fallen to its lowest level since July, as signs of progress in US-China trade talks and a decreasing chance of Brexit without an agreement are removing some tension from global financial markets. Moreover, the narrowing differences in interest rates in major world economies are also reducing the volatility in the currency market.
What could increase volatility on USD currency pairs today is the growing number of votes of FOMC members in favor of not cutting interest rates. This could then support the US dollar. The tone of Fed chairman Jerome Powell's statement at the press conference will also be crucial for the markets. We would like to remind you that the decision on interest rates, due to the change in time, will be published at 19:00 and the press conference will start at 19:30.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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