18.09.201914:04 Forex Analysis & Reviews: The dollar will fall if the Fed cuts rates immediately by 0.50% (We sell or buy EUR/USD and GBP/USD pairs based on the Fed's decision on monetary policy)

More recently, market participants believed that the problem of America's trade war against China is the slowdown in the country's economy. According to the latest quarterly data, it declined from 3.1% to 2.0%, as well as a drop in some production indicators. Moreover, the business activity would force the Central Bank not only to reduce interest rates by another 0.25% this month, but a further general cut in the cost of borrowing is also likely. Therefore, in early September, the market believed that the bank would lower its key interest rate by 0.25% from 96% probability in accordance with the dynamics of futures on federal funds rates.

Yet, everything turned out to be not so simple and unambiguous. Firstly, it seems to us that the Federal Reserve did not give clear signals about the beginning of a cycle of reduction in rates. The reason for such is because it remains acceptable for economically developed countries as a whole even if the economic growth has declined. Secondly, the labor market still showed positive positive dynamics. The unemployment rate of 3.7% has remained low over the past 50 years. And thirdly, the bank quite reasonably believes that there is a real risk of rising inflation just in the wake of increasing customs duties due to the unleashing of trade wars unleashed by D. Trump with almost the whole world. Of course, in this situation, lowering interest rates is a very risky action.

On the other hand, one should also pay attention to the fact that the regulator will have to continue to cut rates in case that the economic growth continues to decline while maintaining the risk of rising inflation. What the bank chooses, time will tell. But again, according to the dynamics of rates on the Federal Funds, the market also expects a possible reduction in rates immediately by 0.50% today. This probability is estimated to be 43.5%.

But if the Fed cuts rates immediately by half a percentage point and lowers by only 0.25%, and at the same time Jerome Powell says that this is not the last decrease, it is highly likely that we should expect a surge in investor interest in risky assets to US stocks above all, as well as a noticeable depreciation of the US dollar.

Forecast of the day:

The EUR/USD pair is consolidating in the range 1.0995-1.1095 until the Fed final decision. If a decision is made to reduce rates by 0.50%, the pair will fly to 1.1160. At the same time, if there is a decrease by the expected 0.25% and the absence of a signal of a prospective possible further decrease, the pair may turn around and fall to 1.0930, since this cut in rates has already been taken into account in the quotes.

The GBP/USD pair seems to be responding to the Fed's decision, as well as to the EUR/USD pair. A breakthrough to the price level of 1.2500 may lead to an increase in the pair to 1.2580. At the same time, the Fed's positive decision for the dollar may deploy the pair and it will rush to 1.2280.