There is a lot riding on this Fed meeting, given a surge of bets that they will deliver a 50bp cut this week, and signal more chunky cuts are to follow. Fed fund futures currently imply a 67% chance of a 50bp September cut and 91% chance of 75bp to arrive by November. They also see a 66% chance of another 50bp cut by December, which would total 125bp of easing by the end of year. They also estimate that rates will be at the 300-325 range by June following 25bp cuts at back-to-back meetings.
That is a lot of easing, especially when you consider that incoming data has been picking up this past month. Many think the Fed are behind the curve and will be forced to play catch up, which is essentially the hard landing scenario. But given the market’s ability to over-anticipate Fed action, I cannot help but wonder if market pricing is simply too aggressive.
1: A very dovish 50bp cut, further 50bp cut/s implied
This assumes current market is correct and the fed are set to deliver of 200bp of cuts by June. This could be the most bearish scenario for US yields and the dollar, and likely give a sucker punch to Wall Street indices for a bout of risk-off trade. I do not see this as a likely scenario.
2: A dovish 50bp cut, 25bp cuts going forward
There could be some logic to the scenario, assuming the Fed want to make a decent head start ahead of the US elections. But under this scenario, they likely remain data dependent to decide the pave and rate of cuts, and the dot plot only allows for 25bp cuts for now. I suspect this could result in some volatile whipsaws in both directions for markets before the US finally higher on short covering (as bears who expected further 25bp cuts close out)
3: Dovish 25bp cut, with 25bp cuts to follow (my bias)
This is my preferred scenario and is aligned with the majority of economists. The Fed simply deliver a 25bp cut, signal further cuts are to come in 25bp and push a ‘steady as she’ goes narrative. Besides, the US economy is not on its knees, and this allows for them to pick up their pace is the economy deteriorates quicker than they estimate without causing panic.
4: Not-dovish-as-expected 25bp cut
I do not think this to be a realistic scenario, give, the high expectations of a dovish meeting. It wouldn’t make too much sense for them to hold out, but it would likely be a strong bearish reaction from Wall Street and provide the cleanest bounce for US yields and the US dollar index.
While I have outlined my base case, volatility levels could be high around the FOMC meeting. Traders therefore need to consider if such a high-volatility even is suited to their risk profile or not before anything else. Sometimes the best trade is none at all, which allows traders to step aside and assess the impact of the incoming news before forming their own directional views.
EUR/USD technical analysis:
Love or loathe the euro, is has a solid bullish trend on the daily chart. Bullish momentum has only increased with each leg higher since the April low, and momentum is once again pointing higher after a solid bounce just above 1.10 and the 50-day EMA. The daily RSI (14) has even developed a decent bullish trend of its own, continues to confirm price action and is not anywhere near overbought. Overall, I suspect EUR/USD could eventually break to new highs, above 1.12.
However, If I am correct in suspecting a post-FOMC bounce for the US dollar, EUR/USD could be in trouble over the near term. Keeping in mind that markets can go on a liquidity hunt ahead of beg events like Wednesday’s FOMC meeting, EUR/USD might try to reclaim the December high before a sharp move lower.
But given the bullish trend structure of the daily chart, dips towards the 1.1069 low And high-volume node (HVN) at 1.1085 could appeal to bulls.
Nasdaq 100 futures technical analysis:
If the Fed deliver a jumbo cut alongside dovish forward guidance, Wall Street indices could be in real trouble. At least over the near-term. And as asset managers have shied away from the tech sector this year, it makes the Nasdaq as the preferred short during times of turmoil.
Prices are consolidating in a tight range near the week’s highs, supported by the 20 and 50-dqy EMA yet reluctant to make a dash for 20k. A less-dovish-than-expected FOMC meeting would likely be the catalyst for a break above the 20,257 high.
However, a move below 19k towards the lower bounds of the triangle on the daily chart could be on the cards.
-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
