The U.S. dollar traded near its lowest levels of the year on Tuesday. Markets are betting the Federal Reserve may begin an easing cycle with an outsized rate cut. Fed funds futures have rallied to push the chance of a 50 basis point rate cut to 69%.
Today’s column by Bill Dudley, the former president of the @NewYorkFed, sets out well the arguments for and against a 50 basis point Fed rate cut this week (please see below from @opinion).
As to where he stands:
“I expect the Fed will do 50. I believe Chair Powell favors an… pic.twitter.com/wGr1NNIfqG— Mohamed A. El-Erian (@elerianm) September 16, 2024
This is up from 30% a week ago. The odds have narrowed after media reports revived the prospect of more aggressive easing.
The recent step up in the markets implied probability of a 50 basis point cut this week, rather than 25 bps, has made it the most likely outcome in traders’ opinion.
It was not a function of new data or a changed view of the Federal Reserve’s risk mitigation mindset.
Rather, it’s…— Mohamed A. El-Erian (@elerianm) September 16, 2024
“Any sign of weakness in Tuesday’s U.S. economic data is only going to reinforce market speculation that there could be a 50 basis points move,” said Jane Foley, senior forex strategist at Rabobank.
August U.S. retail sales and industrial production figures are expected later today. All eyes are on the Fed’s two-day meeting which concludes on Wednesday.
US dollar index, USD/CHF look squeezy if traders pare aggressive Fed rate cut bets $DXY #fx #forex #tradinghttps://t.co/th9qSpU6l9 pic.twitter.com/Mjt25fjLyT
— David Scutt (@Scutty) September 16, 2024
“Regardless of whether the Fed goes with -25 bps or -50 bps on Wednesday, we do think that the Fed’s messaging will be ‘dovish,'” said Macquarie strategists in a note to clients.
bets on significant Fed rate cut
“The USD could weaken against the majors on a very dovish tone, even with a -25 bp cut … the largest losses, if any, are still likely to be experienced against the JPY,” they said.
“That’s because the contrast between central bank outlooks will remain starkest between the Fed and the BOJ, for the time being.”
The Bank of Japan is expected to keep policy steady on Friday but signal that further interest rate hikes are coming. This could turn the next meeting in October into a live one. Sterling – the best performing G10 currency this year with a 3.9% rise on the dollar – has also led the charge against the dollar.
This is thanks to signs of resilience in Britain’s economy and stickiness in inflation. The Australian and New Zealand dollars also rallied through Monday. Traders focused more on the Fed rather than weekend signs of deepening trouble in China’s sluggish economy.
The U.S. dollar index held at 100.6, not far from its 2024 low made last month at 100.51.
- Yahoo.”Global shares rise, dollar pinned lower by Fed rate cut bets”.
- Bloomberg.”USD: Barclays Sees Dollar Rallying 1% Ahead of Fed’s Crucial Decision”.
- Yahoo.”Dollar pinned down by 50 bp Fed cut bets”.