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FOMC Meeting and Potential DXY Scenarios

FOMC Meeting and Potential DXY Scenarios

I will try to keep things simple and clear:

I predict a 25bps rate cut. My reasons:  NY FED’s correction after Wiliam’s speech and Bullard’s statement “a  25 bps rate cut this month would be appropriate”

50bps rate cut would be reasonable if the FED sees a recession possibility. In this case, instead of cutting the rates 25bps in every meeting, one 50bps rate cut would help more. However, the latest data set does not signal an upcoming recession.

The important part is not the rate cut. The statement and Powell’s speech at the press conference. What are the reasons for the rate cut? Weakening U.S economy or negative and infectious effects of global growth?

In light of the data, let us speculate on the arrangements in the first paragraph.

June Statement:

Information received since the Federal Open Market Committee met in May indicates that the labor market remains strong and that economic activity is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although the growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.

July Statement:

Information received since the Federal Open Market Committee met in June indicates that the labor market remains strong and that economic activity is rising at a moderate rate.( I do not expect any change in labor market and growth definition )  Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although gains in household growth have been solid, indicators of business fixed investment have remained soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have dipped/increased but remained low; survey-based measures of longer-term inflation expectations are little changed.

Now let’s check the most important part: Strategy paragraph where  the pricing starts:

June Statement:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

In this paragraph, the signal of the rate cut was replacing “patient” with “ closely monitor”

Potential July Statement:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to lower the target range for the federal funds rate 25 basis points to 2.0 to 2-1/4 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely/continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

Rate Cut and Scenarios:

  1. 25bps rate cut and keeping “closely monitor” unchanged: This means another rate cut in September. This seems to be the base scenario.
  2. 25bps rate cut and replacing “closely monitor” with “patient”: Stronger DXY and Indices Sell Off
  3. 50bps rate cut and “patient”: DXY strong sell and Indices strong buy. Then we will see profit taking and cautious stance of the market because of the word “patient”
  4. 50bps rate cut and “continue to monitor”: Low probability scenario. Indices rally and DXY sell-off.

I will update.

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FOMC Meeting and Potential DXY Scenarios:  Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. Chartreaderpro does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility

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