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At the meeting that ended on Wednesday, the Fed reduced the target range by 0.25% to 1.75-2.00% in full accordance with forecasts and keeping macroeconomic forecasts for GDP, unemployment, and inflation virtually unchanged. The accompanying commentary also did not make any noticeable changes. Also, Powell did not reject the possibility of further reduction if there are prerequisites.
The reaction of the market was restrained and the lack of surprises played in favor of the dollar, which could even strengthen slightly after lowering the rate.
At the same time, not everything went so smoothly. With the final decision of the FOMC, 3 members of the Committee disagreed as Rosengren and Esther called for the rate to remain unchanged, while Bullard proposed a reduction of 0.5% immediately. Deviations from consensus on both sides indicate a growing split. Apparently, members of the Committee see different scenarios for the development of the situation. At a press conference, Jerome Powell said that there are 3 factors to monitor: political and trade uncertainty, global data (global PMI, output, and trade), and US inflation. Thus, the growth of the economy and the labor market are fading into the background and apparently, with a different assessment of this alignment, the split within the FOMC is connected.
What does the FOMC solution ultimately report to the markets? Only that unstable stability is still maintained. No comments that made the dollar go out of range; the dollar supports the lack of confirmation of further rate cuts. Most large banks in their morning reviews note that even the Fed's cautious stance does not negate expectations of further rate cuts. For example, DanskeBank suggests that by the beginning of 2020, the difference between the rate and root inflation will decrease to -1.0%. That is, by the end of the year, two more reductions are quite possible, in October and December.
Mizuho points out that Powell's references to a healthy labor market and sustainable consumer demand are erroneous because the Fed was too aggressive in tightening in 2015-2018 and expects long-term US rates to fall.
Nordea sees some oddity in the fact that the Fed has not yet created a permanent repo mechanism in the face of changes in monetary policy. As a result, the repo rate reached 10% in the face of a high level of bank reserves in the Fed and reduced the rate of excess reserves by 30 p. However, should the situation be somehow corrected, Powell hinted at the termination of QT, that is, the rejection of the policy of reducing the balance at the next meeting in October should prevent a further fall in excess reserves. However, according to Nordea, the main danger is that the US economy will fall faster than predicted Fed.
Thus, the markets are gradually forming the opinion that the Fed will be forced to act much more aggressively in the near future. Trends will contribute to the growth of panic; Investors withdrawing from safe assets and growing demand for protective ones. This means that after a pause, gold will resume its growth. Meanwhile, the oil will not be able to move to $ 100 per barrel, as many predicted after the attack on Saudi refineries, and stock markets make their last attempt to stay on the growth path.
EUR/USD pair
Low inflation in the eurozone will not allow the euro to go up against the backdrop of a weak dollar after the Fed meeting, as it strengthens the chances that the ECB will expand the stimulus program in the near future.
The EUR/USD trading range is narrowing with the resistance at 1.1080. It is more likely to decline to 1.0990 with the subsequent movement to 1.0925.
GBP / USD pair
The basic consumer price index rose in August by just 1.5%, which is noticeably worse than forecasted. The Bank of England is in a difficult situation before today's meeting. Obviously, we won't see a reduction in the rate and the upward momentum is close to exhaustion. According to the results of the day, updating the maximum of 1.2526 is hardly possible but the chances of a corrective downward movement have increased.
At the end of the week, it is likely that the pound will decline to support 1.2391 and beyond.
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