The Federal Reserve announced the first cut to interest rates since 2020 in a decision with broad implications for the US dollar and other major currencies.
After a long period of uncertainty, Fed chair Jerome Powell confirmed an unusually aggressive 0.5% cut to interest rates. Currency markets had previously found themselves in a high stakes guessing game, with GBP/USD and EUR/USD volatile on Wednesday as traders sought to outflank any adverse movements.
A Deutsche Bank survey of more than 1000 market participants found more than 60% of respondents had expected the Fed to cut by 0.25%. That was at odds with the implied likelihood as measured by interest rate futures, a mechanism that allows traders to speculate (or bet, if you’re being less generous) as to its decision. The futures market had started to swing in favour of a larger cut in recent days.
All this meant that risk and uncertainty were the dominant forces for large spells of Wednesday. GBP/USD ranged by almost a cent and couldn’t decide whether to stick or twist, eventually nudging towards its highest in three weeks. EUR/USD moved in a smaller range but was similarly listless, while sterling found some strength against the euro amid the noise.
The Bank of England has the unenviable task of following that drama. While most people still expect it to leave interest rates unchanged at 5%, the pound has experienced an up and down week as sluggish growth data implied an increased prospect of a cut. Andrew Bailey will announce the Monetary Policy Committee’s decision at midday.
All this talk of rate cuts might seem excessive but it has dominated currency markets because of its oversized impact on the economy. Every premature cut leaves the door open to renewed inflationary forces, while every overly cautious hold risks growth stalling, businesses failing and mortgage owners struggling to cope with the higher cost of borrowing.
There was still some data to analyse yesterday. US preliminary building permits came in slightly above estimates at a seasonally adjusted 1.475mn in August. The Midwest region reported the largest increase (12.5%).
The Japanese yen has made a strong recovery against the US dollar recently. It has now recovered by more than 6% from its low in July, largely driven by central bank policy.
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