The below is the eFX summary of a note via Nomura on the Fed and US dollar
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Synopsis:
- Nomura expects a 25 basis point rate cut by the FOMC to initially strengthen the USD but predicts that the USD may weaken during Fed Chair Powell's press conference.
- A larger cut of 50 basis points could lead to more significant USD weakness.
- The firm has also downgraded its USD/JPY forecast and recommends selling USD/JPY and major yen-crosses if there is a rebound.
Key Points:
1. Initial Reaction to Rate Cut:
• 25 Basis Points: A 25bp rate cut is anticipated to result in short-term USD strength.
• 50 Basis Points: A 50bp cut would likely cause more pronounced USD weakness beyond the initial reaction.
2. Impact of Fed Chair Powell's Press Conference:
• USD Weakness: Expectation of USD weakness as Powell's comments are likely to be more dovish, reducing USD support.
3. Revised Forecasts:
• USD/JPY: Nomura has downgraded its USD/JPY forecast into 2025.
• Trading Recommendation: Selling USD/JPY and major yen-crosses is advised, particularly if there is a rebound towards 143-145.
Conclusion: Nomura suggests that while a 25bp rate cut may initially bolster the USD, the currency could weaken during the subsequent press conference. A more substantial cut could exacerbate this weakness. With a downgraded outlook for USD/JPY, they recommend adopting a "sell on rally" strategy for USD/JPY and other major yen-crosses.
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