Markets recover from Fed interest rate cut

Chris Lee

The forex markets spent the latter part of Wednesday and early on Thursday recovering from the announcement by the US Federal Reserve that interest rates would be cut for the first time since the financial crisis.

The bank decided to cut rates by 25 basis points, or 0.25%. This means that interest rates now sit at 2.25%.

It held off on deciding to cut interest rates by 0.5%, which had been expected by some analysts.

In a statement delivered afterwards, the Fed’s leader was ambiguous about what was coming next for the rate and appeared to build flexibility into the bank’s future plans.

“It’s not the beginning of a long series of rate cuts”, said Jerome Powell, the Chair of the Federal Reserve.

However, he was also quoted as stating that: “I didn’t say it’s just one rate cut”, suggesting that there was some room for manoeuvring on the part of the bank.

According to Reuters, some market analysts are estimating that there is just a 12% chance of the Fed cutting rates three times before 2019 is out. As of Wednesday afternoon, this was well over 30%.

The US dollar did not appear to show any concerns over the dovish decision of Powell and the rest of the Federal Open Market Committee, and in fact experienced the opposite. It rose to its highest point in two years in the dollar index, which is a tool designed to assess how the currency is doing compared to six others around the globe. It was recorded at 98.683 at one stage, and later was seen at 98.516.

In its pair against the euro, the dollar also surged heavily. The euro declined by a fifth of a percentage point and reached $1.1052 as trading kicked off in Asia on Thursday morning.

For the euro, this was its lowest position in well over two years. It had not been seen this low since May of 2017.

The British pound saw further terrible performances on Thursday and dropped by 0.3% in the GBP/USD pair. It was recorded at $1.2142 at one stage, which is close to a recent low point not seen since 2017.

On Thursday it will face a big test when the Bank of England meets mid-morning to announce its interest rate decision. It is not expected that the Bank of England will follow in the footsteps of the US Federal Reserve and cut British interest rates, which are currently held at 0.75%.

However, it is possible that the Bank will give an indication of what may have to happen in the coming months in order to keep the economy stimulated if a no-deal Brexit goes ahead.

On Thursday it was reported that a government minister was refusing to rule out the prospect of holding an emergency budget in the event that a no-deal Brexit appears to be on the cards as October 31st approaches – a move which added to uncertainty for the pound and its traders.

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Chris Lee
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