Powell won’t allay market concerns – Commerzbank

A 50 basis point rate cut, if it were to come from the Fed tonight, would be negative for the US dollar (USD). The Fed’s reaction function is more aggressive than previously thought, and not just for today, but possibly for the future, which is negative for the USD, notes Antje Praefcke, FX analyst at Commerzbank.

USD gains on a 25bp move are set to be short-lived

“Since the majority has already settled on 50 basis points, a move of 25 basis points would probably be the biggest surprise and disappointment, so the SUD could recoup some of its losses in an initial reaction. It will depend on how concerned Fed Chairman Jerome Powell is about the economic situation.”

“If clearly concerned that a recession is looming, the market could quickly revert to its expectations of a fairly aggressive rate-cutting cycle in the coming months, putting the dollar under pressure once again. Only if Powell seems confident that the economy will hold up quite well is the USD likely to defend its position or even strengthen a bit.”

“I’m not very confident that Powell will be able to allay market concerns. To do that, it would have to sound very positive, which at this point, and given the data dependency of future interest rate decisions, it hardly can be. Overall, I therefore expect any gains made by the dollar after a 25 basis point move are likely to be short-lived.”