DXY: Will the Fed stick to plans for one more rate cut? – MUFG

Analysts at MUFG Bank, point out the renewed expansion of the Federal Reserve’s balance has recently played a role in undermining the attractiveness of the US Dollar and they argue a rate pause on Wednesday could encourage a stronger Greenback in the near-term. 

Key Quotes:

“The US dollar has rebounded modestly over the past week with the dollar index finding support again from the 200-day moving average ahead of the latest FOMC meeting.”

“The recent easing of downside risks to the global growth outlook from US-China trade tensions and No Deal Brexit risk have also helped to lift US yields. The 10-year US Treasury bond yield has risen to just over 1.8% after hitting a low of 1.5% at the start of this month. US rate market participants still expect the Fed to follow through and cut rates by a further 25 basis points this week although it is now seen as more likely to be the last rate cut delivered this year.”

“Another rate cut would bring cumulative easing to 75 basis points this year which is in line with previous mid-cycle adjustments during the mid-1990’s. We expect the Fed to leave rates on hold in December and resume rate cuts next year.”

“A rate pause this week could encourage a stronger US dollar in the near-term, but downside risks from further rate cuts next year remain in place. The Fed has also been easing policy through renewed balance sheet expansion in response to tight US dollar funding conditions although they have attempted to separate it from their overall monetary policy stance. The Fed’s balance sheet has increased from around USD3.8 trillion in mid-September to almost USD4.0 trillion over the past month. The renewed expansion of the Fed’s balance has recently played a role in undermining the attractiveness of the US dollar.”