Markets could hold keys to 50bp cut – ING

The currency market reinforced its view that the Federal Reserve has moved away from inflation this week. The dollar is trading on the weak side following two above-consensus inflation patterns (CPI and PPI), with the impact of the former proving to be rather short-lived. The swaps market is currently pricing in 37 basis points of easing for next week’s FOMC meeting, implying an equal chance of a cut of 25 or 50 basis points, notes Francesco Pesole, FX strategist at ING.

Cam DXY retests recent lows of 100.5 in FOMC

“They helped overnight a dovish case by former FOMC member Bill Dudley, who explicitly said he would push for a 50 basis point cut if he were still on the committee. In particular, he said: “It’s very unusual to go into the meeting with this level of uncertainty – usually the Fed doesn’t like to surprise the markets.” It could mean the markets themselves may tip the scales towards a half-point move if their bullish bets are held until Wednesday’s meeting. There were also some media reports suggesting it would be a close call between 25 and 50 basis points, which contributed to the favorable repricing.”

“We recently called for the USD to underperform in the US election. Unless the Fed surprises with a nasty rate cut, we think even an accommodative 25bp move can prevent a sustainable dollar recovery. Investors will also monitor the direction of US election polls in the coming days. Kamala Harris is openly calling for another debate, but Donald Trump has ruled her out. Remember Harris is seen as a more bearish candidate for the dollar, and if her good momentum extends from the debate to the polls, we’d really need some data/a Fed surprise to lift the dollar.”

“Today, the only event on the US calendar is the University of Michigan survey, where inflation expectations are expected to have declined in September. If the actual inflation data didn’t help the dollar much, we doubt some second-tier indicators will. With Fed members in the pre-meeting “no-miss” period, there’s no real way to dampen the market’s dovish bets after Dudley’s comments, so the chances of a more favorable repricing by Wednesday – and a stronger performance low dollar – have risen substantially. DXY could retest recent lows of 100.5 in FOMC.”