More Weakness for the USD to Come as the FED Cuts 25bps

The US dollar has experienced a slight decline, dropping by around 1.0% since its peak earlier last week. Recent economic data and signals from the Federal Reserve have increased the likelihood of a more significant interest rate cut at the Federal Open Market Committee (FOMC) meeting scheduled for September 18th. While the market remains divided on whether the rate cut will be 25 or 50 basis points, the odds of a larger 50bps cut have strengthened, driven by weaker-than-expected labour market data.

NFP Data 

 Source: Finlogix Economic CalendarMidweek reports, including the JOLTS job openings and the ADP employment figures, both indicated a slowdown in the labour market. Additionally, the ISM Employment Index came in below expectations, reinforcing concerns about economic weakness. These developments have raised questions about how aggressively the Fed will move to address the changing economic conditions.

Federal Reserve officials have weighed in on this issue, suggesting that they are open to the possibility of a larger rate cut if the labour market continues to deteriorate. For example, San Francisco Fed President Mary Daly emphasized in a recent interview that a worsening labour market would be concerning, although the pace of any rate cuts remains uncertain. Similarly, Chicago Fed President has noted that inflation is steadily decreasing, but the growing signs of weakness in the job market could justify multiple rate cuts to support the economy.

The Fed’s Summary of Economic Projections (SEP), which currently estimates the unemployment rate at 4.0% and core PCE inflation at 2.8% by the end of the year, may undergo significant revisions depending on the results of the upcoming payroll report. This report is crucial as it could spark substantial movements in bond yields and the US dollar, particularly the 2-year Treasury note, which has already seen its yield decline by 23 basis points this week.

From a foreign exchange perspective, the dollar’s future performance will likely hinge on the health of the labour market. A weaker-than-expected jobs report could drive further dollar weakness, especially if equity markets react negatively. In contrast, a strong report might trigger a rebound in short-term yields and provide some support for the dollar. Among G10 currencies, the yen, Swiss franc, and euro have all outperformed the dollar this week, reflecting market positioning for a potentially weak jobs report.

Looking ahead, the yen stands to gain the most if expectations for a 50bps rate cut solidify, with USD/JPY possibly retreating into the 130s. This could continue to unwind the dollar’s strong rally against the yen seen in recent years.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.