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I was following the Fed’s decision on interest rates. I thought if there is an interest rate cut, the EUR/USD will go up but contrary to that it went down on 07/31/2019 immediately after the decision to lower interest rates. Some sites claim that the Fed didn't cut enough (50 basis points) as opposed to the actual cut of 25 basis points. I have been following the news for almost 3 months and no one expected a 50 basis point cut. Is there something I am missing?

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    $\begingroup$ Foreign exchange is a market. If exchange rates followed simple rules like “rate cut means that the exchange rate goes up”, it would be very easy to make money. Since trading is zero sum, that means there are people who are losing money being on the wrong side of the simple rule. Since nobody is going to volunteer to do that, the simple rules are not reliable. As a result, I doubt that there’s a good answer to your question. $\endgroup$ – Brian Romanchuk Aug 1 at 1:11
  • $\begingroup$ @BrianRomanchuk It would be very easy to make money given that other people don't react to the information before you do. That's how a lot of price movements happen. Simple rules... earnings beat, court decision, etc. You just need to react fast enough. $\endgroup$ – Art Aug 1 at 5:02
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The probability of 50 bps cut was non-zero:

https://www.dailyfx.com/forex/market_alert/2019/07/25/usd-us-dollar-turns-to-gdp-data-fed-rate-cut-bets.html

In addition, the Fed's statement afterwards is seen as "hawkish" in the sense that the forward guidance doesn't say the Fed will continually cut the rate. https://www.dailymaverick.co.za/article/2019-08-01-dollar-bears-and-trump-both-dealt-blows-by-feds-hawkish-cut/

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One possibility is that although market participants had generally expected a 25-basis-point cut, they had also assigned a small probability to a bigger 50-basis-point cut.

And so, when it was confirmed that the cut would be 25 rather than 50 points, market participants then reacted accordingly to this (mild) surprise by strengthening the USD.


Edit: Actually, a bigger factor may have been the Fed's failure to promise more stimulus/rate cuts in the coming months (as some/many may have hoped).

For example, Wall Street Journal:

Stock markets sold off and the dollar strengthened Wednesday afternoon after Fed Chairman Jerome Powell disappointed investors in his post-decision news conference when he didn’t more explicitly ratify expectations of additional stimulus in the months ahead.

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