It is well-known that financial markets tend to be dynamic in their sentiment. It is this impermanence that creates the volatility, which traders love and fear so much. If yesterday market participants were expecting two Fed rate cuts until the end of the year, now investors are anticipating that the US Federal Reserve will cut interest rates by 25 basis points at each of the remaining three meetings of 2024 — plus one more cut than predicted last month.
Investors also stated that a violent but brief market sell-off also prompted aggressive rate cut calls related to the unwinding of large leveraged positions as a result of the sudden and sharp rise in the Japanese yen.
Recent data, including last week’s strong retail sales report, suggest that the economy is performing relatively well, even as inflation declines.
According to 54% of respondents (55 of 101), the US central bank will cut the federal funds rate by 25 basis points in September, November and December, taking the range to 4.50–4.75% by the end of 2024.
Markets, which were previously expecting a half-percentage-point rate cut in September, are now pricing in about a 70% chance of a quarter-percentage-point rate cut next month.
The labor market is holding up just fine. It is gradually cooling, but is not expected to weaken that much. The unemployment rate might add another 10% or so. There are no reasons for the Fed to panic.
The unemployment rate is forecast to be around the current 4.3% by 2026. According to median forecasts, inflation is expected to decline only slightly over the next two years.
All measures of inflation — the consumer price index, core CPI, personal consumption expenditures price index, and core PCE — are expected to remain above 2% until at least 2026.
Despite the recent easing, wage growth has remained above the 3.0%–3.5% range, which is considered consistent with the Fed’s 2% inflation target.
The U.S. economy grew 2.8% annualized in the second quarter, much faster than the 2.0% expected by economists. According to the poll, average growth this year will reach the level of 2.5%, faster than what Fed officials currently see as the non-inflationary growth rate of 1.8%.
Two-thirds of common contributors increased their growth forecast for 2024 from last month. The economy was forecast to grow 1.8% next year.
The economists who participated in the poll generally expect the economy to grow at about its trend growth rate at least through 2027. The median forecast from a smaller sample showed the probability of recession at just 30%, with no major changes since the beginning of this year.
Markets will be keeping a close eye on Fed Chair Jerome Powell’s comments on the economic outlook this Friday, the first full day of the Kansas City Federal Reserve Bank’s annual economic symposium in Jackson Hole. So, surprises are not excluded!
The current expectations are setting up a bullish sentiment for the EURUSD currency pair. From a technical point of view, with EURUSD being in an overbought zone on the lower timeframes, a correction to the level of 1.1020 is quite likely.
In the medium term, the EURUSD currency pair will try to renew its high set at the beginning of the year.
The overall recommendation is to buy EURUSD in the short term from the level of 1.1020.
Profit could be taken at 1.1170. A Stop loss could be set at 1.0970.
The volume of the opened position should be set so that the value of a possible loss, defined with a protective stop order, does not exceed 2% of your deposit.
