FxWirePro: Dollar declines as rate cut odds jump ahead on Wednesday’s rate decision from Fed

The dollar is under assault this week ahead of the U.S. Federal Reserve’s monetary policy announcement on Wednesday.

• The dollar index, which is the value of the dollar against a basket of six currencies, is currently trading at 97.67, down 0.67 percent from Friday’s peak. The selloff has gathered pace today, as the index is down 0.2 percent for the day, so far.
• Speculation over a rate cut by the U.S. Federal Reserve as early as this week or at next meeting is pushing the USD down.
• The Federal funds futures market is currently pricing a 64 percent chance of a rate cut in 2019, and price a 23 percent chance that the Federal Reserve would cut rates twice this year. While the market is broadly certain that the Fed would hold rates at this week’s meeting, the market is pricing a 21.6 percent chance of a rate cut by the next meeting in June.
• The latest speculation over rate cut is stemming from the fear of a liquidity crisis in the U.S. banks, which this week pushed the Federal funds rate (FFR) 4 bps above the Interest on excess reserve (IOER). Though the Federal Reserve is currently maintaining an interest rate band (2.25-2.50 percent), the central bank works to keep the ceiling at IOER, which is currently at 2.40 percent.
• As the ceiling came under pressure since late last year, the central bank raised the IOER by only 20 bps, while moving the FFR by 25 bps at the last hike in December meeting last year. The breach of the ceiling suggests liquidity stress in the U.S., which could prompt rate cuts by the Federal Reserve even as Economy continues to grow well above expectation. The first quarter growth rate reached 3.2 percent.

The focus remains on Wednesday’s Fed announcement on the interest rate.