Fed rate cut pricing is shifting slightly in the hawkish direction but it isn’t helping the US dollar.
At one point, three Fed cuts were fully priced into the curve for 2025 but that 75 bps in pricing has slipped to 68 bps. Some of that might be due to the stay on the firing of the Fed’s Cook but I suspect the larger factor is ongoing record highs in US equities. Today the market could also be reacting to a 2% rise in oil prices as Russian production is threatened by Ukrainian drone strikes.
In any case, the market remains certain that the Fed will cut tomorrow and there is a tiny chance of a 50 bps cut priced in. That thinking has allowed the US dollar index to continue sliding. It’s particularly soft today again the euro, Swiss franc and yen (in that order). With that, the US dollar index is threatening the low set in July. If that breaks, we’re back to 2022 levels.
DXY weekly
The euro in already breaking out as it crossed the July high today and is trading at 1.1873, up 113 pips on the day.
“That dip down to 1.14 is now looking something like an inverted head and shoulders that targets +1.20,” I wrote earlier this month.
There is some risk of disappointment (and a USD rebound) if the Fed doesn’t tee up another rate cut with clear language. Powell could do that in the press conference by stressing that they haven’t returned inflation to 2% and that risks remain. I don’t see how he could drop his well-communicated worries that tariff inflation isn’t necessarily transitory, though he’s certainly acknowledged the possibility before.
Further US dollar downside could be triggered if the Fed stresses the deterioration in the jobs market. The two most-recent employment reports were poor and included large downward revisions. Powell could emphasize that they want to protect American jobs and that they don’t want to keep rates any higher than they need to be. That would leave the Fed plenty of opportunity to lower rates towards 3% from the current 4.25-4.50% range without seriously stoking the inflation flames.
Ultimately, I think the doves win either now or after Powell is replaced in May 2026.
