One of the more hot topics in recent times is the discussion on the possibility of interest rates cuts by the Federal Reserve of the United States. In the face of a possible economic slowdown, deteriorating macroeconomic data and a drop in inflation expectations, the FED decision is particularly important.
Before the inflation data from the United States, which will be published today at 14:30, the US dollar weakened to the levels last seen eight weeks ago. This is because the market may speculate that today's reading may raise the odds of interest rate cuts by the Fed. Since the beginning of the month, the American currency has weakened against all major currencies, with the exception of the Japanese yen. The interest rate market has increased the likelihood of interest rate cuts in the US in the face of a growing trade conflict that may weaken economic growth. Also, President Donald Trump once again criticized the Fed for too high interest rates. Trump also stated that the euro and other currencies are devalued against USD.
The interest rate market on the basis of Fed funds futures estimates with an almost 20-percent probability that the Federal Reserve may cut interest rates as early as 19 June. Meanwhile, the odds of cutting at the end of July have already reached 80 percent. It is also possible to cut by 50 basis points. Looking further into the future and looking at the probability calculated at the end of January 2020, it can be seen that the market sees a total cut by 75 basis points - to the range of 1.50-1.75 percent.
If in fact 2-3 interest rate cuts in the US took place within six months, the US currency could be under more pressure, because in no other economy the market expects such a large easing of monetary policy. Today's inflation data may be considered as another tip for monetary authorities in the US and for the market. The consensus assumes an inflation reading of 1.9% and core inflation of 2.1%. Deviation from these values may lead to greater volatility in the US dollar.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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