The FOMC Will Cut Rates, But Not This Month

The FOMC Will Alter Their Stance, Doves Are Flying

The FOMC is expected to now, more than ever before, cut rates in 2019. The CME’s Fed Watch tool is showing a near 100% chance of not one, but three interest rate cuts by the end of the year. This reason is simple, mounting global tensions, tariffs, and trade wars are having a negative impact on the U.S. economy. The risk in the outlook is that, while there is some noticeable weakening in the economy, the U.S. economy is not weak. For this reason and this reason alone traders should not expect too much from the FOMC at this week’s meeting. They are likely to cut rates but not this time around.

How will this affect the dollar? Negatively in my view. A shift in stance from the FOMC will confirm the signal already showing in the DXY chart. The DXY recently fell from a peak to crash through support. The index is now confirming resistance at the broken support line and looks ready to move lower. The MACD peak formed with the crash through support is also telling. It is an extreme peak, a sign of strength in the market, and a signal recent lows will be retested if not surpassed. My targets for support are now $$97.00, $96.50, and $96.00.

The near-term outlook for the dollar is bearish but the longer-term outlook is range-bound. The index is softening on a dovish expectation for the Fed but there are two offsetting factors. First, the FOMC is not likely to be as dovish or cut rates as much as currently expected. The second is that the ECB, BOE, BOJ, and other major world central banks are also on a path to cut rates and stimulate economies; this will keep the DXY moving sideways.

The euro, likewise, looks poised to make a strong move higher. The EUR/USD has been edging higher for the last couple of weeks and is now sitting on a support level. The support is consistent with the 30-day EMA and is potentially strong. The indicators are still mixed but show strong bullish momentum and an extreme peak suggesting the recent highs will be tested. A move above 1.2000 would be bullish, a move above 1.1350 would be very bullish. This week’s data also includes some key reads on U.S. manufacturing and housing as well as a key reads on EU CPI, the ECB’s Economic Bulletin, and Manufacturing PMI.