Dollar falls as Fed’s Williams talks up US rate cuts

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19 July 2019

thomasdodds

The US Dollar had a mixed time of it on Thursday, buffeted in both directions by investor repricing for Federal Reserve monetary policy.

S
peaking at a central bank conference, New York Fed President John Williams claimed yesterday that the Federal Reserve should act preemptively in order to combat low US inflation. Williams said ‘it’s better to take preventative measures than to wait for disaster to unfold’ and that the bank should ‘act quickly to lower rates at the first sign of economic distress’. These comments, combined with similarly dovish rhetoric from fellow Fed member Clarida earlier in the day, sent the greenback around half a percent lower against the Euro on Thursday evening.

The US currency did, however, recover more than half its losses late yesterday evening after a New York Fed representative claimed that Williams’ comments were ‘academic’ and not about immediate policy direction. Regardless, investors were quick to ramp up bets for FOMC easing at this month’s meeting, with some now eyeing up as much as a 50 basis point rate reduction.

Sterling buoyed by retail sales, EU reports

Thursday’s stronger-than-expected retail sales figures out of the UK provided good support for the Pound throughout London trading yesterday, which rose back above the 1.25 mark against the US Dollar. This made Sterling the best performing major currency on Thursday, its largest one day increase in two months.

A vote by British lawmakers yesterday provided additional assistance to the Pound, however short lived. Lawmakers approved proposals that would make it more difficult for the next PM to force through a ‘no deal’ Brexit without suspending parliament. Moreover, there were reports that the European Union may be open to exploring an alternative solution to the NI ‘backstop’, seen as the main sticking point of the entire Brexit process. Markets still remain in a cautious mood, with some betting markets still placing a close to 40% implied probability of a ‘no deal’ (Figure 1).

Figure 1: Implied Probability of ‘No Deal’ Brexit (2015 – 2019)