The Bloomberg Dollar Spot Index was little changed, having lost nearly 1% so far this week as traders await the central bank’s announcement and further guidance on the pace of rate reductions for the remainder of the year.
The Fed started its two-day meeting Tuesday amid signs of a weakening job market and mounting pressure from President Donald Trump to lower rates. Fed Chair Jerome Powell’s dovish speech last month at the Jackson Hole symposium has helped to boost expectations for rate cuts.
“It seems every day markets are pricing in more rate cuts from the Fed,” said John Doyle, vice president of dealing and trading at Monex. “Total 75 basis points by the end of the year is the new base case.”
US job growth cooled notably in August with the unemployment rate rising to the highest level since 2021, fanning concerns the labor market may be on the cusp of a more significant deterioration. In addition, data released last week showed that US job growth was far less robust in the year through March than previously reported.
Swaps traders have fully priced in a quarter-point rate cut by the Fed later today, with a very small chance of half a point. Even stronger-than-expected retail sales released Tuesday failed to derail those bets — though it does suggest that a rate reduction is unlikely to exceed a quarter point. Market participants will also be watching the central bank’s dot plot, which shows how much more easing policy makers project in the months ahead.
Amundi SA’s head of global currencies, Andreas Koenig, believes that the Fed would be making a “policy mistake” by cutting rates at a time when fiscal stimulus expected in the coming months risks fanning inflation risks. Because of this, Koenig is sticking to his plan to sell the dollar in a bet that it will keep falling.
Hedge funds added to option trades on Tuesday, betting the dollar would weaken further in coming months versus a range of currencies including the euro, yen and Australian dollar, according to currency traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.
The euro held near a four-year high hit on Tuesday as the European Central Bank is expected not to cut rates further, narrowing the gap between its key rate and the Fed’s. Meanwhile, the Swiss franc was supported against the dollar, after it rose to its strongest level since 2015 on Tuesday.
