To Cut, or Not to Cut: FOMC Set To Begin

Following the decision last week from the Bank of Canada (BOC) and the European Central Bank (ECB) to cut rates by 25 basis points the focus this week for investors and traders will be on the Federal Open Market Committee (FOMC) Wednesday. The FOMC two-day policy meeting begins Tuesday and is widely expected to culminate Wednesday with the Fed once again leaving rates unchanged. Many feel the stronger than expected jobs report Friday sealed the deal for the Fed to hold steady considering the strength in the US economy.

Assuming the Fed leaves rates unchanged the real question becomes what happens to the US Dollar in an environment where the ECB is willing to cut but the Fed is not. It lends itself to further Dollar strength which could become a headwind for stocks. For more than a year the US Dollar and the Euro have been rangebound and limited in terms of conviction one way or the other. Both remain stuck within the range they have been in over the last year as policy makers have been on hold in this data dependent environment. But with the strong US economy vs what we’re seeing play out in Europe and in Canada for that matter where labor and economic indicators show the higher rate environment taking a toll on their economic situation more so than us here in the US. If the Fed is unwilling or able to cut and the ECB and the BOC are forced to continue this path, well we could be in for a big move up in the Dollar.

So, the Fed will be key this week not only in determining the trajectory for stocks which have largely rallied into the end of last year and this year on rate cut expectations and yields which much like the dollar have been rangebound and supportive of the strength we’ve seen in stocks. But also, for the US dollar and the relationship it shares with the Euro currency.

Lastly don’t forget it’s not just the Fed this week, we’ll also hear from the Bank of Japan (BOJ) Friday morning. While the BOJ is unlikely to do anything this week in terms of rates, we could hear about bond purchases slowing as they attempt to normalize.