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The Dollar will rebound if the Federal Reserve opts to stick with its guidance and cut interest rates by 25 basis points today, but strength will be shortlived according to one analysis.
"We would look to fade the USD bounce," says Alvise Marino, a Strategist at UBS, who adds that a decision to go with a 50bp move could propel the Pound-Dollar rate closer to its end-2024 forecast target in short order.
Money market pricing shows investors are oscillating between a 25bp and 50bp rate cut, with the latter bolstered by recent media reports from journalists that have strong links with the Fed.
However, the media reports differ from the more concrete guidance given by members of the FOMC, which is why a consensus of economists still thinks 25bp is the way to go. An analysis from Bank of America meanwhile says a 50bp cut risks undermining the Fed's communication credibility and that while a 50bp cut could well be warranted, maintaining credibility should come first.
Foreign exchange markets are meanwhile poised for volatility, with day-ahead implied volatility spiking, confirming elevated uncertainty ahead of the decision that should ellicit a volatile market response.
For the Dollar, a 25bp cut would offer some short-term relief, although much would depend on the accompanying statement and forecasts, which could well point to a desire to speed up the process.
"The dollar should rally on a 25bp move. However, if Powell and Dot Plots are as dovish as we think, dollar gains may soon prove unsustainable," says Francesco Pesole, FX analyst at ING Bank.
"While we would anticipate a 25bp cut to drive a knee-jerk USD rebound, we also believe that said rally would lack staying power if coupled with a dot plot and/or with guidance that does not fundamentally push back against "the spirit" of the priced in outlook for Fed policy rates. Under such circumstances, we would look to fade the USD bounce," says Marino.
The Pound to Dollar exchange rate rose to a high of 1.3229 on Tuesday and is close by on Wednesday, with technical analysts now looking for a retest of the 2024 high at 1.3266.
A 25bp cut would put the Pound back under pressure, but the downside would likely be limited as such a move would potentially lower the odds of a cut at the Bank of England on Thursday. We note expectations for a cut from the Bank rose to as much as 30% on Tuesday as markets tagged along with Fed expectations.
A 50bp cut from the Fed would prove unequivocally negative for the USD, says Marino. He says this will potentially lead to an earlier-than-anticipated test of the UBS investment bank's end-2024 targets.
These are EUR/USD at 1.12, GBP/USD at 1.35, AUD/USD at 0.70.
"If the BoE holds its horses after the Fed lets them run free, it might propel GBP/USD towards 1.35 – a level at which it last traded in February 2022," says Robert Howard, a market analyst at Reuters.