How Deep Will the Rate Cut Be?

Today, September 18th is the day that forex traders have been waiting for since mid-August, as the Federal Open Market Committee will meet and announce their interest rate decision at 18:15 GMT. At this point, it is no longer a question of whether or not they will cut, but by how much. Currently, the Fed needs to decide on what kind of action it wants to take, an aggressive 0.50 % rate cut which may be considered as a stiff intervention and it could have far-reaching implications on the market or on the other hand, a 0.25 % rate cut which might be already embodied in the current market price. We have to mention that the third alternative which would be that the Fed will leave the rates unchanged however unlikely that may be. In reality, Chairman Bernanke will probably be more concerned about recession risks so taking this road will be highly risky for the conservative Chairman and his staff. Furthermore, this rate decision has been built up so much that anything less than a 0.25% rate cut has the potential to send equities and forex carry trades plummeting, while the greenback would likely fall sharply against currencies like the EUR and GBP. Alan Greenspan (the former Fed Chairman) said the odds of a recession have grown since earlier this year, even though “the economy is not doing badly at this stage.” Additionally MR. Greenspan added yesterday that: “US future economy seems pretty gloomy”, however it might be a prominence for launching his new book so we need to put everything in proportion. Regardless, Tuesday promises to bring substantial volatility and a break away from range trading. Bottom line, a greenback recovery is closer then it looks.