Investing.com – The U.S. dollar was hit hard by expectations that the Federal Reserve will start its rate-cutting cycle this week with a massive 50 basis point cut, but that raises the possibility of a rebound if a smaller cut occurs, according to Morgan Stanley.
The US central bank begins its final policy-setting meeting later in the session, amid growing expectations that it will cut interest rates by 50 basis points at the end of Wednesday’s meeting.
CME Fedwatch data showed that traders are pricing in a 68% chance of a 50 basis point rate cut and a 32% chance of a 25 basis point rate cut.
This led to the US dollar falling to its lowest levels this year.
“US economists remain unconvinced that a 50bp rate cut is possible,” Morgan Stanley analysts said in a note dated September 16. “They expect a unanimous decision to cut rates by 25bp, with the dot plot shifted downward to show a total of 75bp of rate cuts by the end of 2024, versus market pricing of around 115-120bp.”
The bank’s US economists also do not expect the president to provide specific guidance on the pace of the easing cycle…and are likely to remain data-dependent, suggesting that future decisions will be a function of available data.
This finding suggests that the Fed may not believe that the currently available data justifies a pace of easing faster than 25 basis points per meeting.
“This interpretation is likely to push the US dollar broadly higher in the near term, immediately after the meeting,” the bank added.
However, beyond the emotional reaction, we may see a split in the performance of the US dollar, trending lower but trending higher against emerging market currencies and commodities.