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.

fxsoriginal

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.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD nears weekly highs as risk-on returns

The EUR/USD pair was dragged higher by a soaring Pound, now hovering around 1.1040. The market is all about sentiment, and this last dependent on Brexit and the US-China trade relationship.

 

EUR/USD News

GBP/USD pulls back from multi-month top amid mixed Brexit news

With Brexit tensions on paramount, GBP/USD awaits confirmation of recent rally while taking a step back to 1.2760 amid the initial Asian trading session on Wednesday. DUP, Tory and Irish members seem to dislike the UK PM’s Brexit deal.

GBP/USD News

USD/JPY in search of a firm direction, stuck in a range below mid-108.00s

The prevalent risk-on mood weighed on the JPY’s safe-haven status and extended support. A sharp fall in the US bond yields undermined the USD and failed to impress bullish traders.

USD/JPY News

Cryptos: Incumbents don't know to play well

The Libra project led by Facebook remains on track despite the first defections. Those who have abandoned the project are mostly payment gateways. Bitcoin's lack of tone weighs on Ethereum's mood.

Read more

Gold slumps to $1,480 area on Brexit hopes

The troy ounce of the precious metal continued to weaken in USD terms in the American trading hours as markets cheered reports claiming that the European Union (EU) and the United Kingdom (UK) are closing in on a draft Brexit deal that could be announced before the end of the day on Tuesday.

Gold News

Forex Majors

Cryptocurrencies

Signatures