Fed meeting keeps U.S. Dollar humble as cuts may come

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Fed meeting keeps U.S. Dollar humble as cuts may come

SEPTEMBER 18, 2019

The U.S. Dollar is trading in quiet ranges as markets eagerly await the Federal Reserve’s policy decision this afternoon at 2 PM.

Overview

FX flows took a backseat to a dramatic move in the “Repo rate,” the discount rate at which the Fed repurchases securities from commercial banks. Money markets went a bit crazy yesterday after the New York Federal Reserve had to intervene with an injection of $53.2 billion into the market as the Repo interest rate, the key to overnight financing for businesses, went to an obscenely high 10.0%.

This was four times higher than its average and where it was last week, thus causing headaches all over Wall Street. Experts explain that this is the result of many forces at once: corporate tax payments, big treasury bond options, and the growth of the U.S. budget deficit.

This will likely be a main topic of discussion as Fed chair Powell speaks at his press conference as some economists believe the Fed has lost reins of short-term financing. About the main interest rate, odds of a 25-basis point cut stands at 82.9% and for 50-basis point reduction at 17.1%. A decision to stay put would be a major surprise, but there have been hints of dissidence.

What to Watch Today…

  • Fed Decision and Press Conference 2 PM

Complete Economic Calendar can be found here.

EUR

Spain and Italy continue to sway influence on Euro stability as the former country will go into general elections for the fourth time in as many years in November and a new party is being formed in the latter. The shared currency is up, however, as liquidity was compromised in U.S. money markets during the repo drama. Politically, Italy’s situation is moving towards cooperation as a new government was formed with a new alliance between the Five-Star Movement and Democratic Party, however the democrat leader, former PM Matteo Renzi, latter is trying to form his own movement while saying he supports Giuseppe Conte as Prime Minister.

Building stable coalitions have proven very difficult in the third and fourth-largest economies of the bloc. Spain’s PM Pedro Sanchez has not been able to rule through his Socialist party gets the majority of the votes the last four years. Shifts in regionalist separatism, a rise of nationalism, and social changes have led to the formation of multiple political parties with too many diverse interests yet no cohesion. Economically, the bloc is looking to spend more, but that is impossible with governments that cannot pass anything through. Euro is set to be guided by further political drama as well as the worrisome slack in consumption as revealed by very low car sales yesterday.

GBP

The Pound gained some ground against the buck as statements from the Prime Minister and the EU Commission President seemed mixed as it pertains to the direction of a Brexit deal. Ultimately, EU’s Jean-Claude Juncker said that there was positive air from the meeting, however, that time is of the essence and so close to the deadline a no-deal situation is “palpable.”

It seems like the main development to look for will be the U.K. Supreme Court’s decision, which may come tomorrow, whether to recall Parliament or keep it shut if it is found to be abiding by constitutional law. If Parliament comes, Boris Johnson will be forced, by law, to delay, thus eliminating the no-deal fears helping Pound surge in the process.  

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