Summary Outlook: (Wednesday, October 29 at 14:15 ET) We expect the FOMC to lower its target rate by 50 bps from 1.50% to 1.00%, which is in line with market consensus. Alternative outcomes of only a 25 bps cut are favored by many economists, while a large minority of futures traders (42%) is expecting 75 bps of easing. We think the primary FX reaction will come from how stock markets react, and the calculus there is essentially the larger the rate cut, the more positively stocks may react; the smaller the rate cut the more negatively shares are likely to respond. For currencies, that translates into higher stocks signaling higher USD/JPY and JPY-crosses (like EUR/JPY or AUD/JPY) while lower stocks should lead to declines in those currency pairs.

Trading Strategy: Stock markets have already begun to recover significantly this week, part of which is likely the pricing-in of Fed rate cut expectations. As a result, we are uncertain how much more stocks can gain post-FOMC given a likely bleak assessment (see below) and would reckon that a 50 bp rate cut might result in more of a "selling the fact" reaction in stocks rather than additional euphoric gains. Also, we are mindful of looming month-end portfolio adjustments that are likely to see significant USD-buying demand, as well as anticipated rate cuts next week from the ECB and the BOE. For those reasons, we look to use further gains in EUR/USD (on the back of EUR/JPY buying) and GBP/USD (from GBP/JPY buying) to sell EUR/USD and GBP/USD:
We look to sell EUR/USD between 1.2850/1.2950; stop over 1.3050; target 1.2400/1.2500
We look to sell GBP/USD between 1.60/1.61; stop over 1.6200; target 1.5350/1.5450
We would stand clear in USD/JPY due to volatility, but would consider buying USD/JPY on weakness below 92.00 on the basis of expected MOF/BOJ intervention ahead of 90.00; stop below 89.50; target 98.00.
FOMC Statement Analysis: The FOMC press statement is likely to closely resemble the one from the unscheduled meeting earlier this month, when the Fed cut rates by -50 bps. The main takeaway will once again be that the Fed believes economic activity continues to slow while inflation pressures are coming off in a big way. US economic data of late have been awful with employment, consumer confidence, retail sales and manufacturing indexes all deteriorating. Meanwhile inflation continues to come off the boil with oil prices declining another -30% since that last Fed meeting. The market expectations for inflation are nonexistent. The breakeven yield, which measures the market "implied" inflation by taking the difference between nominal and inflation protected securities is actually negative in some cases. This suggests deflation is more of a worry at this point.

The Fed will continue to highlight the ongoing problems in the credit markets, but they will also likely note that the recently planned measures (capital infusions and buying toxic mortgages from banks) are likely to provide much needed relief. This will be merely to calm markets as the thawing in credit conditions has been minimal thus far. Lastly, the Fed will probably leave in the statement that "the Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability." This will suggest to the market that the Fed is leaving the door open to further rate cuts down the road but not fully committing to them. In other words, they will be in wait-and-see mode and act accordingly.