USD Soars after Fed’s Hawkish Cut, the EUR Drops to New 26-month Low

July 31, 2019 (Western Union Business Solutions)  – If this week’s Fed meeting was a test of dollar strength, the U.S. unit passed with high marks. The dollar cruised to new highs after the Fed fired its first rate cut in a decade. The greenback clocked May and June highs against the yen and Canadian dollar, respectively, and motored to its strongest in over two years against the euro and sterling. The dollar took comfort from the Fed maintaining an upbeat outlook for the world’s biggest economy. Dollar bulls were particularly emboldened by the Fed ruling out a “lengthy” rate cutting cycle, dubbing its action as a mere “mid-cycle” rate adjustment. Markets responded by scaling back expectations of lower U.S. interest rates, thereby assigning a brighter outlook for the greenback. The dollar faces more tests of strength in U.S. data today on manufacturing and tomorrow on the job market.

EUR

A hawkish rate cut from the Fed this week drove the euro through a key floor to its weakest level in 26 months against the greenback. Meanwhile, data Thursday confirmed the weak state of Europe’s manufacturing sector, a key growth engine for the export-driven economy. European numbers this week showing lower inflation and a sputtering factory sector intensified pressure on the ECB to deliver stronger stimulus at its next meeting in September.

GBP

Sterling resumed a slide against the greenback that knocked it to 2 ½ year lows. No Bank of England rescue for the pound, as all nine officials voted to keep interest rates at a low 0.75%. Britain’s central bank also downgraded its outlook for U.K. growth this year in the face of turn for the uncertain Brexit has taken. The world’s No. 5 economy, meanwhile, remained stuck in a soft patch as data confirmed British factory activity contracted from the third time in as many months in July.

CAD

Canada’s dollar tumbled to six-week lows against the greenback after the Fed cut rates but played down prospects of a “lengthy” easing cycle. USDCAD’s buoyancy will face scrutiny in U.S. and Canadian data Friday on trade. However, the main focus tomorrow will be on America’s employment report for July. Solid job growth would weaken the case for the Fed to follow up this week’s rate cut with another anytime soon, a scenario that could push USDCAD higher.

America’s dollar reigned as it rolled to new highs for the year against a wide swath of rivals. Any rate cuts by the Fed appear to be modest instead of the bolder cuts that market had priced in. The Fed cut rates this week for the first time in years but it signaled the move was more insurance to safeguard the economy from global headwinds. The Fed upended market expectations of three or more rate cuts by year-end, resulting in a brighter outlook for the greenback. How high the bar is actually set for rate cuts should hinge on U.S. data. That puts the focus on today’s ISM manufacturing index and tomorrow’s influential nonfarm payrolls report. Prints that back the Fed’s favorable baseline outlook for the U.S. economy would bode well for sustainable dollar gains.

 


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