Dollar on the verge of collapse. The expert described three scenarios
Focus on today’s fed decision. The prices of the futures rate is already incorporated expectations of a decrease of 25 basis points, and forecasts a similar reduction at the next meeting in September. There is little doubt the reduction in the rate, so the main attention is focused on the markets review the fed: how the controller is ready to continue the chosen line of monetary policy. Expectations management will be the most difficult task for the fed during today’s press conference.
Recent years there is a significant gap in the market expectations and the forecasts of the fed: investors are waiting for softness, and the controller sets to a hard line. The convergence of these polar views is the key driver of the market since October last year. During the past weeks the dollar was influenced by a reassessment of the chances of a rate cut by 50 b. p. to the extent that, as the probability of this outcome fell from 60% to the current 20%. Consider the possible actions of the fed and their impact on the markets.
Option 1. The unusual softness If the fed will make it clear that a similarly cautious look into the future, as the debt market (i.e. the futures rate), it is able to inspire action on continued growth, as low interest rates are beneficial for business activity, fueling demand. This outcome means a reduction in bond yields, and investors can once again begin the hunt for yield. This shift in rhetoric can become bad news for the us dollar and is able to start a trend on many months of weakening. Potentially, this will lead to the decline in the dollar index by 9% in area 89 in the USDX and EURUSD to 1.23. Such an outcome would be a victory for trump, however, risks to criticize the actions of the fed and compromise its independence.
Option 2. More fog
The second option (most likely). Powell may try to keep the doors open and to catch up with fog on the prospects for rates, saying that the future path is not predetermined, depend on the state of the world and the American economy. Stock markets in this case will remain close to highs of 98 at the USDX and will be looking for cues from data on the labor market and to wait for the outcome of trade negotiations. In this case, EURUSD will remain relevant, the struggle for 1.10. The reaction of the currency market though can be sharp in the first minutes after the announcement, is unlikely to contribute to the drastic change in trend of the dollar, leaving it in limbo near two-year highs.
Option 3. Stiffness
The fed can make it clear that lower rates is a one-time measure, and further easing is not guaranteed. This can be a major surprise to the markets, launching a strong wave of dollar growth. In this case, the uptrend may accelerate to the end of the year to send 103 to the USDX, and EURUSD to 1.04-1.05. Even more extreme will be the hint that in the coming months the rate may be raised, if successful trade negotiations, as well as if recent data confirm a cautious approach to policy at the moment.
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