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The Federal Reserve (the central bank of the U.S.) has announced a significant interest rate cut, reducing rates by 0.5 percentage points (half a percent). This brings the new short-term interest rates down to between 4.75% and 5%. It's the first major rate cut since the start of the COVID-19 pandemic in early 2020.

This cut is meant to help support the economy by making borrowing cheaper, which can lower costs for things like mortgages. People were expecting a smaller cut, but the larger reduction reflects the Fed’s commitment to keeping the economy on track without falling behind on issues like inflation or the job market.

In simple terms, the lower interest rates mean it should be cheaper for people to borrow money, whether it’s for homes or businesses, helping boost economic activity.

So what does this mean for us, as FOREX traders - particularly for USD pairings?
- Potentially weaker USD, dependent on initial expectations
- Increase in market volatility
- Lower yield differential. Could lead to investors shifting out of USD, hence putting downward pressure on USD


The question of 'Will USD strengthen or weaken', is equivalent to asking 'Will investors price in more dovish actions by the Fed in the future, given the size of the recent cut?'.

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