Markets brace themselves for Fed decision

Denise Jackson

Wednesday’s forex trading calendar looks set to be dominated almost entirely by the Federal Reserve’s interest rate decision in the US, which is out at 6pm GMT.

The decision is expected to have wide-ranging ramifications for monetary policy around the world. The Federal Reserve has not reduced interest rates since the era of the financial crisis, meaning that this is a significant milestone in policy terms.

Analysts believe that the Federal Open Market Committee, the branch of the organisation which makes the decision, will reduce rates by 25 basis points from 2.5% to 2.25%. However, there is still believed to some chance that it could go even further and slash 50 basis points from the headline rate. Some market prediction services were showing a 78% chance of a 25 basis point cut, with a 22% chance of further cuts of 50 basis points.

The Fed’s policymakers are believed to be in a position where they think pre-emptive action is a smart decision. This is likely to reassure the forex markets somewhat, as it is not believed that policymakers consider the US economy to be in immediate ill health. It is also believed that despite the rate cut the markets will instead focus largely on whatever hints are made about the future direction of monetary policy.

In the run-up to the decision on Tuesday and into Wednesday, the dollar index, which monitors how well the greenback is performing compared to a wide range of other currencies across the globe, managed to remain firm. It was recorded at 98.055, which was only slightly lower than the eight-week high point of 98.206 which it reached on Tuesday.

In its pair with the single European currency, the dollar was also relatively firm at $1.1154. In its pair with the safe haven Japanese yen, the dollar was unmoved at 108.575 yen.

This was perhaps due to the central bank of Japan’s decision to keep interest rates at their current level, while also announcing that it would be happy to stimulate the economy if needed at a future date.

The British pound continued to remain at an overall low point, although it did appear to rise a little. In its pair with the US dollar, it went up to $1.2152 – although that was only slightly above the 28-month low point it had seen earlier in the week. It looks set to go out of July with an overall loss of more than 4% on the month. This was due in large part to the arrival in office of Boris Johnson, Britain’s new pro-Brexit Prime Minister.

Just today, some US politicians said that they would be prepared to hold up any post-Brexit deal between the UK and US in the event that Johnson’s Brexit plans jeopardised the peace process on the island of Ireland. The country is separated by a border between Northern Ireland and the Republic. If Britain (including Northern Ireland) leaves the European Union, the Republic will remain – meaning that the currently frictionless border may be at risk.

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Denise Jackson
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