Fed Anticipations Drive U.S. Dollar to Depth Not Seen in Three Years (Regarding Interest Rates)
The U.S. Federal Reserve (Fed) is set to announce its interest rate decision tonight, with traders fully pricing in a quarter-point rate cut. This decision comes against a weakening labor market and pressure from President Donald Trump to cut rates.
The Fed's decision will be closely watched, particularly the Fed's dot plot, which indicates how much further easing policymakers expect in the coming months. Market participants expect the Fed to cut interest rates by a total of about 75 basis points in 2025, including the 25 basis points already cut in September, with additional 25 basis point cuts likely at the October and December meetings.
Tuesday's unexpectedly strong U.S. retail sales data did not dispel expectations of a rate cut, suggesting that a rate cut is unlikely to exceed a quarter point. The market's view is that the Fed is on the brink of starting a rate-cutting cycle that could extend until the end of next year.
Hedge funds have been active in the markets, expanding their options trades on Tuesday, betting that the dollar will continue to lose value against a range of currencies, including the euro, yen, and Australian dollar. The Bloomberg Dollar Spot Index has fallen for the third consecutive day, and the U.S. dollar is approaching a three-year low.
The euro rose to a four-year high on Tuesday, and the euro and yen have contributed to major currencies gaining against the U.S. dollar. The Swiss franc also rose to its highest level against the U.S. dollar since 2015, narrowing the spread between the ECB's policy rate and the Fed's.
The Fed's decision comes after data released last week showed that employment growth in the U.S. from March to March was less robust than previously reported. Employment growth in the U.S. cooled significantly in August, with the unemployment rate rising to its highest level since 2021.
Fed Chair Jerome Powell's cautious speech last month at the symposium in Jackson Hole fueled expectations of rate cuts. According to John Doyle of Monex, the markets are pricing in a total of 75 basis points of Fed rate cuts by the end of the year. The probability of a half-point cut by the Fed is very low.
Traders are awaiting the Federal Reserve's announcement and clues about the pace of rate cuts for the rest of the year. The European Central Bank, however, is expected to implement no further rate cuts.
The transactions were made by hedge funds and were anonymous due to not being authorized to speak publicly.
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