Large traders are clearly bracing for the Fed tmrw as Forex produces volatile tight ranges. A rate cut is expected, but cautious Fed rhetoric will likely follow.
Forex has been a dangerous wagering ground for retail traders since the end of September. Financial institutions which clearly were betting on a more dovish Federal Reserve starting in early summer becoming a central theme into 2025 have been proven half right, this as the Fed has cut interest rates and is expected to do so tomorrow. However, being half right leaves the door open to also being half wrong, and financial institutions have reacted to this by becoming aggressive buyers of the USD since late September as perspectives have changed. The strong USD trend the past two months plus has hit some speculators hard.
The election of Donald Trump added a strong dose of impetus for USD buyers, this as the President-elect's tough rhetoric regarding tariffs caused reactions and fear of unknown consequences. In the past couple of weeks more tranquil Forex trading has emerged and the USD finally started to give back some of its gains, yet the USD versus most major currencies, like the EUR/USD, remains within the the stronger elements of it range. While the Fed is expected to lower its Federal Funds Rate tomorrow by 0.25 to 4.50% tomorrow, traders need to remember this has been priced into Forex already. Tranquil trading the past two weeks indicates financial institutions have readjusted their outlooks to the incoming White House administration.
Now it is time to see if the U.S Federal Reserve has started to adjust their outlooks to what a Trump Presidency means. And financial institutions are keen to better understand the outlook of the U.S central bank. Inflation numbers while traversing lower are still rather stubborn and this may will not help the Fed's mid-term mindset regarding interest rate cuts. GDP in the U.S has remained steady, and there is the potential the economy in the States will improve under Trump. Unemployment numbers while showing signs of weakness have not been terrible either. So while the Fed's current Federal Funds Rate is higher than normal taking into consideration the historic average the past ten years, they still may not feel they have enough ability to cut interest rates too much more without sparking inflation.
A January rate cut seems unlikely at this time. If the Fed does sound guardedly cautious tomorrow, retail traders may see the USD get initially weaker due to the Fed rate cut, but then see a storm emerge and USD centric strength reappear all in the same day - perhaps in the span of minutes. Speculators need to understand that financial institutions have already baked tomorrow's interest rate cut into the cake. So it isn't the rate cut tomorrow that is important if it happens (if it doesn't then that's another story); it is what the Fed says and traders should expect them to be very cautious - because per the recent trading of the USD and a barometer it appears financial institutions are bracing for a more vigilant Fed.
Just like he has with many folks he views as uncompromising before, Donald Trump may begin to feel Federal Reserve Chairman Jerome Powell is not on his side regarding interest rate policy. If the Federal Reserve chooses to sound hesitant to cut interest rates in early 2025, it will be rather intriguing to see President-elect Trump's response. Could a confrontation between the White House and Federal Reserve be in the cards over the next six months?
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