SINGAPORE- The dollar wobbled near a seven-month low on Tuesday on wagers the US central bank will start cutting interest rates from next month, with traders bracing for comments from Federal Reserve Chair Jerome Powell on Friday.
The weakness in the dollar lifted the euro to its highest this year, while sterling was perched near a one-month peak. The MSCI’s emerging markets currency index also hit a record high.
The focus this week will be on Powell’s speech in Jackson Hole, likely keeping investors hesitant in placing major bets before the event. Minutes of the Fed’s last meeting due to be released on Wednesday will also be in the spotlight.
Investors largely expect Powell to acknowledge the case for a rate cut and will parse his words for cues on whether the Fed will start with a 25 basis point cut or a 50 bps cut in September.
While labor market deterioration led to the markets expecting a bigger rate cut in September, data since has been mixed with upbeat retail sales still signaling a resilient consumer, said Charu Chanana, head of currency strategy at Saxo.
“This could keep Powell wary of sending a strong signal on the magnitude of the first rate cut. Also, any clear risks of a larger rate cut could also signal a policy mistake from the Fed and higher recession risks.”
Markets are pricing in a 24.5 percent chance of a 50 bps cut in September, down from 50 percent a week ago, with a 25-basis-point reduction having odds of 75.5 percent , the CME FedWatch Tool showed. Traders are pricing in a total of 93 bps of cuts this year.
A slim majority of economists polled by Reuters expect the US central bank to cut rates by 25 bps at each of the remaining three meetings of 2024.
