No, the title is not related to today's Fed decision. It is something related to corporate liquidity. Strains in the short-term funding market added an unexpected twist ahead of Wednesday's FOMC decision, and one that could have important implications. More on this below. The euro was the top performer Tuesday while the Swiss franc lagged. The Fed decision is at 2 pm EST, 7 pm London. A new Premium Insights' trade has been issued yesterday.


Some final economic data points ahead of the Fed were positive on Tuesday as industrial production cooled worries about manufacturing. The NAHB home builder survey also beat expectations in a sign that lower rates are enticing home buyers.

Those numbers were ignored by markets as the focus turned to a jump in repo lending rates. Short-term funding costs rose as high as 10% and forced the Fed to hastily arrange a $75 billion repo operation. In an embarrassing moment, the first try failed before the Fed got at $53B take-up in the second effort. Another operation is scheduled for Wednesday.

Short-term dollar-funding strains have hit markets before but came at quarter-end and year-end. This mid-month problem was likely caused by a confluence of factors including corporate bond issuance, tax payments and Treasury auction settlement – all of which drain reserves. So why were firms not ready for it?

What has the market worries is that it might not be those factors alone. The Fed's balance sheet runoff was always more art than science and policymakers believed that keeping it near $3.5 trillion preserved ample liquidity in the system. That may not be the case.

If so, the Fed could be forced to announce fresh measures in what would be interpreted as QE-lite. That speculation is likely what drove the dollar lower Wednesday. Other fresh factors to watch now include lowering IOER by 5 bps and a standing repo facility.

In terms of the bigger market move, a 25 basis point cut is priced in and signals about October will be key. The Fed likely still likely to describe it as a mid-cycle adjustment (and that language is key, and would be dollar positive) so the plan is probably to cut once more, then wait-and-see and expect guidance to be vague once again.  Also watch out for the FOMC dissenters, possibly 3-way dissent, with Rosengren & George voting to hold rates unchanged, Bullard asking for a 50-bp cut and the rest for 25-bps. A more likely scenario & a bad one for markets is for Bullard to vote along for 25-bps but 3rd dissenter joins Rosengren & George in voting for no cut.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!

Latest Forex Analysis

Editors’ Picks

EUR/USD pressured around 1.13 after jump in US jobs

EUR/USD is trading around 1.13, down after US Non-Farm Payrolls shocked with a leap of 2.5 million jobs in May, contrary to all projections. The greenback is gaining while stocks are falling, a correlation breakdown. ECB stimulus previously supported the euro.


GBP/USD retreats from highs

GBP/USD is trading below 1.27, off the highs. The pound is struggling after Chief EU Negotiator Barnier reported little progress in Brexit talks. Robust US jobs support the dollar.


XAU/USD retreats further to $1670, lowest in five weeks

Gold prices are falling sharply on Friday on the back of the US employment report that boosted equity markets and sent US yields to the upside. XAU/USD is losing more than $40 on Friday and recently bottomed at $1670/oz, the lowest intraday level since May 1.

Gold News

Institutional demand exceeds Bitcoins supply

Greyscale floods the market with fresh money to satisfy the demand of its clients. Investors, willing to pay a 29% surcharge for exposure to Bitcoin without suffering the legal and operational inconveniences. Market remains at risk on the verge of new bullish territory.

Read more

WTI rallies above $39 as focus shifts to OPEC+ meeting

Crude oil prices built on Thursday's modest gains and rose sharply on Friday boosted by the upbeat market mood optimism surrounding Saturday's OPEC+ meeting. 

Oil News

Forex Majors