The Greenback Takes an August Leap After Fed Trims Rate

. 4 min read

Overview:

  • The greenback climbed to its highest level against other major currencies since 2017 despite mixed signals from the Fed.
  • EUR/USD tumbled by 0.35% with investors nervously watching the 1.10 handle.
  • WTI Crude oil price loses $1 over concerns of a pending global economic slowdown.

Highlight:

The Canadian loonie was unable to stand against a resurgent US dollar which climbed to its highest level against major currencies since 2017. In a widely expected move, the Federal Reserve lowered its target range to 2 to 2¼% but avoided any commitment to go on a cutting spree. With oil prices sliding lower over fears of global economic slowdown, the CAD had no other direction than to go but south. USD/CAD has broken recent trading range and expected to challenge the 1.33 levels.

US DOLLAR

In a well-telegraphed move, the Federal Reserve delivered its first rate cut since 2008. The FOMC, after reviewing diverse scenarios, believed a rate cut of ¼ basis point was a necessary mid-cycle adjustment to maintain the economy on a sustainable growth path. The Fed statement was a near-perfect copy and paste job from the last time, which left many in the market confused about the decision.

Fed Chief Powell also sent out mixed signals expecting the latest action to be neither a one-off nor “the beginning of a long series of rate cuts”. At best, the central bank remains data-dependent with more weights placed on growing external uncertainties triggered by trade tensions. The greenback makes an august surge across the board, sending the euro to its lowest level since April 2017 and which opens the door to challenge the key 1.10 handle. The market is expected to trade within tight ranges today with an eye on tomorrow’s US employment report.

BRITISH POUND

The Bank of England left its Bank Rate at 0.75% in a unanimous vote this morning. The Monetary Policy Committee sees an intensification of global trade tensions, a growing likelihood of a no-deal Brexit. and weaker GDP in Q2. The Bank was however quite bullish in its outlook and sees a rebound in business investments once the uncertainty over the UK’s future trading relationship with the EU is clarified. However, before we get there, we expect incoming data to be volatile and the Doomsayers to keep the [ound under pressure.

EURO

The Euro is under severe selling pressure after the FOMC decided to take a step back and trim its rate. EUR/USD is trading near its lowest level in two years, losing nearly 0.35% on the day. After recording soft economic growth, the Euro bloc was presented with new evidence of contraction this morning. The latest manufacturing PMI saw the fastest contraction in the sector in seven years, with the index at 46.5 in July (June 47.6). Firms are expecting lower production in the near term in a climate of increasing global uncertainties. It is slowly becoming increasingly difficult for the ECB to remain inactive with alarm bells ringing across the member countries.

CANADIAN DOLLAR

Commodity currencies are trading with a softer footing after the Fed’s rate cut announcement. USD/CAD moved to the upper end of the recent trading range, with USD strengthening across the board and the DXY index at its highest level since 2017. The market still ponders on the next move from the central bank. With WTI oil prices trading lower (down 1.90% on the day) and a relatively light economic calendar, the pair is expected to trade with a bid tone.

AUSTRALIAN DOLLAR

The Aussie dollar slid under 0.69 relative to its US counterpart despite strong data out of China and a positive Caixin/Markit Manufacturing Purchasing Manager's Index. July improved to 49.9 in July, up from 49.4 in June, and beating market expectations.

FEATURED CURRENCY

USD/JPY was unable to sustain its move above the three-month high and a bout of profit-taking activities has taken the pair below the 109 mark, and is now trading in negative territory. The threat of increased global uncertainties is likely to encourage safe flows into the Japanese Yen. Meanwhile, soft local data is expected to keep a lid on exaggerated strength: Manufacturing PMI at 49.4 in July, stays below the 50-growth mark and recording a third consecutive monthly contraction. Firms have reduced stocks and prices to encourage more demand. Trade tensions between the US and China are likely to have spillover effects on other trading partners.