In less than two hours, we have the big market event everyone has been waiting on for several weeks now – the FOMC Interest Rate decision. I thought I would pass on a few thoughts ahead of the decision and potential currency movements based on the possible outcomes.
The debate up to this point has been, “Not IF the Fed will cut rates, but by how much?” 25 basis points or 50 basis points?
A rate cut of at least 25 basis points has been factored into the markets, and if we do see that come to pass, is it enough to stem off the possibility of a recession in the US? Market players won’t think so and will start kicking and screaming that it’s not enough to pro actively stem off a recession and kick start the housing market back up.
Some feel that a 50 basis point cut would do the trick, but this outcome is less likely to happen. That decision would most likely spark a further rally in equities and a Yen selloff as risk appetite rises, but the concerns of a weakening US Dollar begin to come into play which would create a difficult situation for the US economy.
So, what will the Fed do? How about, “No rate cut!” Haha! Well, this outcome is the least likely event to happen, but an event we should consider as the threat of inflation still looms over the Fed. A couple of inflation effects we are currently seeing are rising commodity costs (Oil $81+ a barrel today and rising food costs). Also, a depreciating US Dollar which has an inflation effect as goods from overseas become more expensive to the US consumer. USD depreciation will most likely continue regardless of the decision today, and possibly accelerate after any interest rate cuts.
So, what will we see? 25 Basis Points, 50 Basis Points, or No cut? We will just have to wait to find out, but here are some ideas on the possible outcomes:
25 Basis Point cut? We may see a short term rally in USD against the Euro and the Swiss Franc as traders take profits on the short Dollar positions leading up to this event. Longer term Dollar decline will probably resume in the weeks to come after volatility slows down.
50 Basis Point cut? We will most likely see the Dollar decline further against the Euro and Swiss Franc, and especially against the Canadian Dollar (as the Loonie strengthens on rising Oil prices heading into the winter season) and Australian Dollar (a declining Dollar will lead to higher gold prices) because of their relationship to commodities.
No rate cut? This unlikely event will probably cause a short term rally in the Greenback, especially against the Euro (trading near all time highs and looking overbought at the moment) and the British Pound as the UK is currently experiencing their own lending problems with the potential for disaster.