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Greenback Soars After Fed Rate Cut, But No Further Reductions

Albert Edwards
by Albert Edwards on September 19, 2019


U.S. dollar highlights:

USD stronger after the Federal Reserve lowered interest rates by 25bps (as expected and already priced in). However, the Fed also noted there will be no cuts through 2020. The Federal Open Market Committee was split regarding the monetary policy decision as one member voted to cut rates while two voted for a rate hike. The Fed also highlighted strong consumption, slow global growth and weaker investment; meanwhile, the labour market remains strong, economic activity is rising, and inflation remains below the 2% target. This is the second interest rate cut in 2019 (after the first one in over a decade in July). USD strengthened after Chairman Powell’s speech and the dollar index also increased. Lastly, the Fed said they would act “as appropriate” to sustain expansion. Powell also said that global growth is weaker, trade tensions resurfaced since the last meeting and more rate cuts may be needed if the economy weakens. The Fed does not forecast a recession and the household sector is in very good shape. Markets will focus again on the China trade developments and geopolitical concerns with Iran regarding the drone strike on Saudi Arabia last week.

Canadian dollar highlights:

CAD weaker after Consumer Prices for August decreased 0.1% monthly and lowered down to 1.9% year over year (from 2% previously in July). This was the lowest since March (due to lower gasoline prices). Core Inflation was the lowest in four months at 1.9% (from 2% in July and lower than expected 2.2%). Oil prices remain firm to support CAD, but this has been limited due to geopolitical concerns causing safe-haven USD. Retail Sales for July available tomorrow.

Euro highlights:

EUR lower after the Federal Reserve was hawkish, causing USD higher. After last week’s drone attacks on Saudi Arabia and the European Central Bank cutting interest rates by 10bps, EUR dropped. Global trade tensions and Brexit risks are affecting German manufacturing, adding fears of a possible recession. Consumer Prices for August increased 0.1% monthly and 1.0% year over year (both as expected); meanwhile, Core Inflation remained flat at 0.9%. This is the lowest inflation rate since November 2016. EUR remains vulnerable due to Brexit risks and central bank monetary policy (more rate cuts are expected). Central Bank policy maker Francois Villeroy expressed his concerns about aggressive stimulus which also affected EUR.

British pound highlights:

GBP continues falling after comments from European Commissioner Jean-Claude Juncker regarding the risks of a no-deal Brexit. The main issue remains the Irish backstop and a no-deal Brexit may put the U.K. into a recession. The Supreme Court will review Prime Minister Boris Johnson’s suspension of parliament and this could result is resuming activities to allow lawmakers to be part of the Brexit process before the October 31 deadline. Meanwhile, Consumer Prices for August increased 0.4% (lower than expected 0.5%) and 1.7% year over year (versus expected 1.9% and lower than previously 2.1% in July). This is the lowest inflation rate since December 2016. Retail Sales for August available tomorrow.