Correction of US rate expectations are going too far

Yesterday, even without an explicit trigger, the US dollar rallied quite a bit, with EUR/USD falling below 1.095 and USD/JPY targeting 150 again, Commerzbank’s FX analyst Michael Pfister notes.

Inflation figures are likely to be quite acceptable

“At the same time, the market is now pricing in just around 42 basis points (bp) of Fed rate cuts by the end of the year (almost 20bp less than a week ago), which would not even be equivalent to a 25bp cut at each of the two remaining meetings. Looking further ahead, the market has priced out another 20bp, meaning that expectations for next September are now almost 40bp lower than before the payrolls.”

“Meanwhile, the question is whether the market has gone a little too far in its correction. Yesterday's minutes of the September decision showed that there was certainly opposition to the 50bp cut, and recent comments from officials often suggest that they are not unhappy with the current state of the economy. Nevertheless, it seems unlikely that the Fed will pause at either of its next two meetings after cutting rates by 50 basis points. Moreover, payrolls are still trending slightly lower and last week's figure is likely to be revised several times. Therefore, the baseline scenario remains a 25 basis point cut at the next meetings.”

“Although today's inflation figures are likely to be quite acceptable, there is a risk that the figure for the core rate in particular will be close to the rounding limit upwards. The market would likely take this as another sign that the Fed is slowing its rate cuts. So while there is much to be said for a somewhat weaker dollar in the medium term, the odds of this happening in the short term are not quite so good, at least not today.”

Share: Feed news

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. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.