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CAD
The loonie is trading modestly stronger this morning after last night’s Fed meeting. That said, we still think USDCAD looks cheap when considering the divergent fundamentals of the US and Canada. The former looks on track for a soft landing, the latter is flirting with recession. This should warrant a faster pace of easing from the BoC relative to the Fed, all else being equal. More to the point, we think last night’s Fed decision now opens the door to 50bp cuts from the BoC. If confirmed by Governor Macklem later this week, loonie downside should follow.
USD
The big news overnight, and the event everyone had been waiting for, saw the Fed cut rates by 50bps, taking the target Fed funds range to 4.75-5.00%. Markets had been evenly split ahead of the announcement between expecting 25 or 50bps of easing. We felt the former was more likely given the potential signalling effect, but, as we wrote yesterday, we also saw the case for a larger dose of easing given our view that the Fed should have cut rates in July. Given last night’s decision and accompanying commentary, this view is apparently now shared by the FOMC as well. While the statement, SEPs, and Chair Powell’s press conference all supported easing rates, none offered an explanation as to why 50bps was necessary. Indeed, when Powell was challenged on this point, he struggled to provide any explanation, and then changed the subject. To us, this looks like a tacit admission that the FOMC made a mistake in July by keeping rates on hold – a view reinforced by Chair Powell’s statement that there is no need to rush, and that yesterday’s 50bp cut was not indicative of the future pace of easing.
Instead, the FOMC collectively suggested a labour market that has normalised and an economy that has returned to better balance. This saw the SEPs price in two more rate cuts this year, 100bp of easing in 2025, and an upgrade to the long run dot, matching our pre-announcement expectations. It is also a shallower path for rates than markets had expected, resulting in some interesting greenback gyrations. While the broad dollar initially sold off sharply on the 50bp headline, details for yesterday’s event quickly saw this reverse with the greenback ultimately ending the day unchanged. Further upside for the dollar looks likely to us as well, provided markets can align with the FOMC’s suggested path for US rates.
EUR
Like most G10 pairs, EURUSD finished Wednesday trading exactly where it started. While the Fed’s decision to cut by 50bps did see an initial pickup for the pair, ultimately the move retraced on the more hawkish details of last night’s decision. Today, there is little data flow from Europe to offer much impetus for the pair. Instead, the more interesting price action is likely to be found on crosses, with rate decisions due from both the BoE and Norges Bank. The latter left policy unchanged in a decision announced at 09:00 BST, but with no signal that rates will be lowered until early 2025, NOK is trading on the front foot against the euro this morning.
GBP
The BoE is set to be the focus for sterling traders today, with a policy announcement due at noon. A hold is widely expected, and is our base case, meaning that Bank Rate should stay unchanged at 5.00%. With some residual risk of a cut still priced into markets, this should see a modest bounce for sterling against the euro and the dollar if realised. That said, we would not entirely rule out a cut either – especially having seen the Fed deliver a 50bp cut overnight.