FOMC Slashes 50-BP

The FOMC, as largely expected, cut its benchmark-lending rate by 50-basis points to 3.0%. In the accompanying statement, the Fed reiterated lingering downside risks to growth – acknowledging that "financial markets remain under considerable stress" amid tightening credit conditions. The Fed said that recent data points toward further deterioration in the housing market and softening in labor conditions. However, the Fed highlighted the need to continue monitoring inflation in spite of expectations for it to moderate in the coming quarters. The greenback, initially stronger heading into the announcement, quickly gave back its gains – slipping to 1.9960 against the sterling and near the 1.49-level versus the euro.

On the data front, US reports painted contrasting outlooks for the economy. The January ADP payrolls blew away consensus estimates for a slight increase to 45k from 40k, instead spiking to 130k. Traders quickly rewarded the dollar following the release. Shortly after, markets were treated to a polar opposite reading on the economy, with the advanced Q4 GDP revealing anemic growth of 0.6% compared with a robust 4.9% reading from the previous quarter. The disappointing growth rate for the fourth quarter, which was its lowest since 2002, fuelled speculation that the US economy is heading into a recession – further supporting the case for additional policy easing from the FOMC in the coming months.

Also worth noting was an announcement from Qatar, which said it was mulling over its currency policy. Qatar’s peg to the dollar has resulted in heavy inflationary pressure given the greenback’s broadbased descent in recent years.

Traders will look ahead to a barrage of economic data from the Eurozone and US in the session ahead. The Eurozone reports consist of Germany’s unemployment rate, retail sales, Eurozone economic sentiment, HICP flash and E-13 unemployment rate. Meanwhile, in the US, the data include personal income, consumption, weekly jobless claims, Q4 ECI and the Chicago PMI.