Fed cuts rates by 50bps, market response subdued… for now

For a while, it looked like it wasn’t going to happen. At the start of last week, markets were almost certain that the FOMC meeting on September 18 would result in a standard rate cut of 25bps, with futures traders putting the odds of a larger cut at 15%. But last Friday, Bloomberg, WSJ, and the Financial Times simultaneously reported that the Fed was seriously considering a bumper 50bps cut.

The probabilities of a larger rate cut whipsawed, and by the morning of the 18^th, futures traders were putting the chances of a 50bps cut at higher than 60%.

So, there was little surprise when the Federal Reserve followed through and decided to cut big.

It wasn’t just the size of the cut that was unusual but also the circumstances surrounding it. In times past, when the Fed cut by more than 25bps, it was a reactionary move to severe market turbulence. While the markets are currently fragile as we exit an inflationary cycle, there has been no sign of the fear and desperation that usually accompanies a 50bps cut.

“The US economy is in a good place, and our decision today is designed to keep it there,” Powell told reporters at the press conference following the meeting.

Some analysts were worried that the unusual nature of the large rate cut might have spooked the markets and that investors would fear that the Fed’s move was a sign of an incoming recession.  

But markets have been surprisingly subdued. As expected, the USD fell on the news, with the DXY index down to 100.5 before rebounding in trading today.  Stocks rebounded today after initially falling on the news of the rate cut. In Europe, the Stoxx Europe 600 index rose 1.4% and the FTSE 100 up 1%. In the US, the S&P 500 and the NASDAQ are set to open 2% higher.

However, given the historic nature of the intervention, the moves have been relatively minor. Will the quiet last, or is this just the calm before the storm?

The Federal Reserve has fired the gun on the rate cutting cycle and you can almost hear the sighs of relief from central bank boardrooms around the world. We can now expect a relatively rapid reduction in interest rates for all major currencies and a period of increased volatility.

Technical Analysis

Having made a slight recovery at the beginning of the month to above the 101.00 level, the US Dollar Index (DXY) retreated below 100.00 following yesterday's 50bps rate cut announcement.

From a purely technical perspective, there appears to be the formation of a double top (black rectangle) but price has not decisively closed below the neckline, suggesting potential downside moves.  The RSI sits at 40, while price trades significantly lower than all three EMAs (the 50-EMA. 100-EMA, and the 200-EMA), further confirmation of the bearish bias.

With this month’s rate cut and projections for further rate cuts this year, a continued softening of the dollar is expected. Should this be the case, a close below the December 2023 low of 100.250 could send the price down to the 14 July 2023 low of 99.099.

On the upside, the price would have to breach the 101.55 level, and beyond that, the resistance created by the 50-EMA at 101.912.