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Surprise in forex markets after huge Fed rate cut

Chris Lee

The US Federal Reserve took some in the forex markets by surprise on Tuesday after it significantly slashed US interest rates.

The world’s most famous central bank made the emergency move at a meeting on Tuesday.

While it had been expected to cut interest rates by some level, the speed and size of the cut was startling to some.

It reduced rates by 50 basis points, which was equivalent to 0.5%.

The bank’s interest rates now sit in the “target range” of 1.00% to 1.25%.

The meeting was not supposed to take place for another fortnight but was instead convened on an emergency basis.

Now, it is believed that the money markets are pricing in chances of a future 0.25% cut of well over 50%.

The CME Group’s FedWatch Tool is claiming that another 25 basis point cut in April has a probability of occurring at 60%.

The move this week came largely as a consequence of fears about the coronavirus, which continues to spread around the world despite containment efforts on the part of a number of agencies.

As a result of the rate cut move, the US dollar went down to its worst performing position in nearly two years in its pair with the Swiss franc, which is known for being a safe haven currency.

In this pair, the greenback was spotted at 0.9561.

The downfall for the dollar – which until recently had been seen as a good choice for traders and others looking for their investments to remain secure in the context of the coronavirus – was exacerbated by a perceived failure of leaders in the Group of Seven (G7) countries to establish a strong plan of action.

The group released a statement on Tuesday, although this was criticised for not including a concrete plan of action to address the slowdown caused by the virus.

Against the Japanese yen, which is another so-called safe haven currency, the dollar was again down – this time to 106.85, which was its worst performance in approaching five months.

It was later seen stabilising at 107.26.

The US dollar did not appear to be distracted by the US Democratic primary race, which held its “Super Tuesday” of voting yesterday.

Centrist candidate Joe Biden and radical candidate Bernie Sanders emerged as the clear frontrunners.

Elsewhere around the world, the onshore version of the Chinese yuan was up to its highest point in six weeks against the US dollar.

The currency was seen at 6.9400 in this pair – and this came despite data which showed that the Chinese services sector was down to its worst ever position in February.

The single European currency was up in its dollar pair to $1.1166 which is its best position in nearly a whole month.

It has been doing particularly well against the pound too.

In this pair it was seen at 87.10 pence.

Markets now appear to have accepted that the Bank of England will reduce interest rates in the country by 0.25% when the Bank of England meets at the end of March.

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Chris Lee
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