Investing.com – The US dollar has been hit hard by expectations that the Federal Reserve will start its rate cutting cycle this week with a big cut of 50 basis points, but this raises the possibility of a recovery if a smaller cut occurs, Morgan Stanley told Morgan Stanley .
The US central bank will begin its latest policy-setting meeting later in the session, amid growing expectations that interest rates will be cut by a hefty 50 basis points at the end of a meeting on Wednesday.
Traders expect a 68% chance of a 50 bp cut and a 32% chance of a 25 bp cut, CME Fedwatch showed.
This has resulted in the US dollar falling to its lowest level this year.
“Our US economists remain unconvinced that a 50 basis point cut is likely,” Morgan Stanley analysts said in a September 16 note. of 75 basis points of rate cuts by end 2024, versus market prices of ~115-120 basis points.”
The bank’s U.S. economists also “do not expect the chairman to provide specific guidance on the pace of the austerity cycle… and will likely remain data-dependent, indicating that future decisions will be a function of available data.”
This outcome suggests that the Fed may not believe that currently available data warrants a pace of easing above 25 bps per meeting.
“This interpretation is likely to push the USD broadly higher in the short term immediately after the meeting,” the bank added.
But beyond the knee-jerk reaction, we could see a split in USD performance, with the rate lower but the USD rising against emerging market and commodity currencies.
