US Dollar Sinks As Fed Announces Emergency Rate Cut By 50bp

on Mar 3, 2020
Updated: Apr 3, 2020
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  • Fed cut rates by 0.5%, which are now targeted in a range between 1%-1.25%
  • President Trump asked for a rate cut just minutes before the Fed’s announcement
  • USD trades lower across the board as EUR/USD gets closer to setting a new 2020 high

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The US dollar is trading lower across the board after the Federal Reserve cut interest rates by 50 basis points in the first emergency move since the global financial crisis.

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Fundamental analysis: Rate cut not seen as a surprise

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The Federal Reserve has announced today a rate cut of 50 basis points in an emergency move aimed at supporting the economic activity amid the coronavirus outbreak.

At 10 AM (EST), the Fed released a statement announcing a cut. The vote was unanimous.

“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent,” it is said in the statement.

“The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy”.

The rate cut comes just minutes after the U.S. President Trump tweeted about Fed being wrong for not cutting the rates.

Analysts expected a rate cut as a response to the coronavirus outbreak with the Goldman Sachs noting yesterday that they expect a 50-basis-point cut this month, followed by two more rate cuts “in April and June, for a total of 100bp.”

“The committee obviously decided not to wait for things to deteriorate — I think they know as we all should that the headlines over the next few days are likely to be alarming as they pertain to the spread of the virus,” said Eric Winograd, senior economist at AllianceBernstein.

Earlier today, the Reserve Bank of Australia (RBA) cut borrowing costs to 0.50%, which is a new record low in response to the coronavirus outbreak.

Technical analysis: Dollar smashing continues

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Following the 7-week rally to open the year, which saw the US dollar index (DXY) hit a 3-year high, the roles quickly reserved and the USD bulls have now given up 80% of previous gains.

USDX weekly chart (TradingView)

In case of a break of the bullish parallel channel, the price action is likely to move lower towards the crucial support for the USD bulls in the $96.20 – $96.50 zone. It is unlikely that this support block will be broken easily. The near-term resistance, in case of a relief rally, is at $97.80.

The rate cut has pushed EUR/USD above the $1.12 mark, near the 2020 high of $1.1222.

Summary

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The Federal Reserve cut interest rates by 50 basis points in the first emergency move since the financial crisis. The move hasn’t surprised many as expectations were in place for the Fed to cut rates and help the economic activity to recover amid the coronavirus outbreak.

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