Dollar slumps as markets raise odds of 50bps Fed rate cut

The US dollar experienced a sharp decline overnight as the probability of a 50-basis-point (bps) rate cut by the Federal Reserve next week surged. Fed fund futures now indicate a 40% chance of such a cut, up from just 14% the previous day. The prevailing market expectation had been for a more modest 25bps reduction.

Following last week’s strong non-farm payrolls report and higher-than-expected core inflation data, most traders had discounted the likelihood of a larger cut. However, fresh analysis from major financial media outlets, including The Wall Street Journal and Financial Times, has shifted market sentiment dramatically.

Nick Timiraos of The Wall Street Journal, often regarded as the “Fed Whisperer,” suggested that the central bank faces a “rate-cut dilemma” — whether to opt for a large or small reduction. He pointed out that the Fed is increasingly concerned about keeping interest rates elevated for too long, as evidence mounts that higher borrowing costs are effectively cooling the economy.

A report in The Financial Times echoed this sentiment, emphasizing that a more aggressive 50bps cut could reduce risks and expedite the normalization of borrowing costs. This move might help ease economic strain and protect the labor market from further damage.

Nevertheless, not everyone is on board with the idea of a larger rate cut. Ratings agency Fitch expressed caution, pointing out that the Fed’s previous challenges in controlling inflation could lead to a more measured approach. The central bank struggled to tame inflation over the past few years, revealing potential gaps in its understanding of inflationary pressures, which could make policymakers hesitant to act too swiftly.

In the commodities market, gold surged after surpassing the $2,531 resistance level earlier this week. The metal’s rally gained further momentum as the dollar weakened. Gold is now approaching a key resistance zone just below the $2,600 mark. A decisive break above this level could propel prices higher, with an extended run potentially targeting the $2,750 region.