At the start of 2024, it seemed only a matter of time before US policy rates started to decline. It now appears that the first interest rate cut will not come until September. After a strong first half of the year, the dollar may soon come under some pressure.
In recent weeks, currency markets have had to switch quickly between political surprises and developments on the interest rate front. After the elections in France and the United Kingdom, attention shifts to the interest rate decisions that central banks have to cut. Last Thursday it was the European Central Bank's turn. Eyes are now mainly on the US Federal Reserve and the Bank of Japan, which will make a decision shortly before the end of this month. The latter bank already initiated a policy change two weeks ago by slightly boosting the yen rate. Meanwhile, the United States has been following the credo 'the dollar is our currency, but your problem' for more than fifty years.
Our currency, your problem
That statement made by then Treasury Secretary John Connally in 1971 could easily be repeated in the 'America First' era. In any case, the US central bank does not take currency consequences into account when formulating its interest rate policy. In the past month, the dollar has fallen by more than 2% to almost the lowest level of 2024. This means that financial markets are anticipating that policy rates in the United States may fall somewhat faster than they expected last spring. Fed Chairman Jerome Powell recently told Congress that the economy is no longer overheated and that the labor market is cooling. Instead of focusing on the inflation risk, Powell says the central bank is also looking at the danger of an economic slowdown.
Read between the lines
Anyone who reads between the lines will quickly see that Powell is opening the door to give the economy a boost through a falling policy interest rate. He has that room because inflation fell from 3,4% to 3,0% over the course of the year. Moreover, the chance that there will be another interest rate cut this month is very small. According to the FedWatch Tool, that chance is currently priced at less than 5%. However, that probability increases to more than 98% for the Fed meeting on September 18. And at the end of this year, the policy interest rate is expected to be as much as 0,75 percentage points lower than now, according to FedWatch. However, it is not wise to blindly rely on these types of forecasts. The publication of economic figures or political events can make the future suddenly look very different.
Switch quickly
In the latter category, the election date of Tuesday, November 5 obviously stands out. Joe Biden's withdrawal last weekend and the attack on Donald Trump on Saturday, July 13, may have increased the former president's chances somewhat. Although the dollar theoretically benefits from the policy that Trump wants to implement, the currency actually fell slightly against the euro during his previous administration. And then there is also the scenario that the Democratic Party puts forward another candidate. Fortunately, currency markets have been able to practice switching quickly between politics and economics in recent months.
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