Markets are currently fully pricing in a 25 bps cut from the Fed next week, with a 50 bps cut priced in at 30%, down from as high as 50% on Friday
The dollar dropped on Tuesday before U.S. inflation data and the U.S. presidential debate, which could impact expectations for the interest rate outlook.
A mixed labour report on Friday failed to make a clear-cut case for whether the Fed would deliver a regular 25 bps rate cut or an outsized 50 bps one at its September 17-18 policy meeting. Traders are now waiting on Wednesday’s U.S. CPI report.
Barclays strategists noted that the dollar typically weakened ahead of Fed easing cycles and tended to overestimate rate cuts during so-called soft economic landings. Still, they said, a large part of its move had probably already happened.
Investor focus will also be on the U.S. presidential debate later on Tuesday that could weigh heavily on the November election.
Should a clear winner emerge from the debate, expect the forex market to start ‘front-loading’ positions it would have taken after the election result in November, according to Chris Turner, head of forex strategy at ING.
Investors see the dollar rising in the event of a Donald Trump victory, as tariffs might prop up the currency and higher fiscal spending could boost interest rates.
The dollar index was at 101.62, down 0.03%.
Markets are currently fully pricing in a 25 basis points cut from the Federal Reserve next week, with a 50 basis points cut priced in at 30%, down from as high as 50% on Friday, according to the CME FedWatch tool.
For 2024, traders expect 110 basis points of easing, up from nearly 100 basis points, from the remaining three meetings.
Fed policymakers last week hinted they are ready to start a series of rate cuts, with Governor Christopher Waller saying he could support back-to-back cuts, or bigger cuts, if the data suggests the need.
