The FOMC’s decision on the cost of money was not a surprise to markets. Once again, the statement of the FED’s chairman turned out to be more relevant, yet this (at least in part) was also expected. An interest rate cut happened in England, where one vote ultimately decided the outcome.
US holds rates
Yesterday’s decision on the cost of money in the US was in line with expectations. Interest rates in the US remained in the range of 5.25-5.50%. Another significant event was the speech of the FED’s chairman which took place right after the decision. This time Jerome Powell didn’t pull punches. The markets finally heard a more concrete statement (compared to previous ones) regarding the monetary policy for the second half of 2024. If macroeconomic data doesn’t deviate from the intended direction (stable job market, inflation heading towards 2%), we can expect the so-called “pivot” even at the next meeting, i.e., in September. After this news, the dollar only slightly weakened against the euro (from 1.08 USD to 1.083 USD), which means that the FED’s September move was already included in the Eurodollar price. Looking at the first day of August at the probability of a cut at the next FOMC meeting, we see a clear 100%. 86.5% of the market expects a cut of 25 basis points. The remaining 13.5% expects a double move.
Dollar strengthens
By Thursday afternoon, there is no trace in the EUR/USD rate of Wednesday’s FED decision and the evening weakening of the American currency. By noon today, the Eurodollar’s quotations dropped from the earlier mentioned 1.083 USD to 1.078 USD. The half-cent strengthening of the “greenback” is the second fact showing that investors have long since “digested” the imminent interest rate cuts in the United States. Even their mention by the FED chairman doesn’t impress them that much. Perhaps a larger scale of cuts would prompt investors to sell the dollar, but, so far, there are no clear indications for such a move. While inflation still hasn’t dropped to the target, it has stabilized around 3%, which even with the announced rate cut still gives positive real interest rates. The labor market is the second aspect. Here, though, we are receiving mixed data lately. Today’s Challenger Report (the planned number of layoffs) showed a value almost half lower than the previous one (25.8 thousand versus 48.8 thousand previously). On the other hand, we notice an increase in the number of applications for unemployment benefits. This indicator is alarming but is not a clear signal of a significant deterioration in the situation on the American labor market.
Decision from the Isles
After seven pauses, that is, no changes in the interest rates, the UK saw a cut today. This means that the British, like the European Central Bank and the Swiss National Bank, have outpaced the American FED with their decision. However, the voting in the Isles was not unanimous. 5 people voted for a cut. The remaining 4 called for the eighth pause. This means that the cost of money was lowered from 5.25% to a straight 5%, which was in line with forecasts. This move seems logical in the current situation of the UK, where consumer inflation on an annual basis dropped to 2% YoY, unemployment increased to 4.4%, and economic growth is virtually nonexistent (the last GDP reading was at 0.3% YoY). A lower cost of money should improve business conditions, but the effects of interest rate cuts will have to wait for a few quarters. Today’s decision, though dovish, had a positive effect on the pound’s rates, which an hour after publication is strengthening against the euro, dollar, and franc. The GBP/PLN rate at 14:00 is 5.09 PLN.
Author: Dawid Górny, currency analyst at Walutomat.pl
Source: https://ceo.com.pl/sierpien-zaczynamy-decyzjami-ws-stop-procentowych-13664
