The first cut is the deepest – Commerzbank

It’s time for interest rate cuts – that was the key message from Fed Chairman Jay Powell in Jackson Hole on Friday. How fast and how far will the interest rate cut cycle go? Powell could only say: It depends on the data, notes Ulrich Leuchtmann, head of FX and Commodity Research at Commerzbank.

USD Weakness After Powell’s Jackson Hole Speech

“USD selling continued strongly. Even without any surprising evidence from the president. Market expectations (implied in federal funds futures) about what the Fed will do in September, November and December hardly changed as a result of Powell’s speech. They have already fallen since the last US labor market report.”

“The only thing that helps here is to understand exchange rate changes as changes in risk premiums for one currency or another. Anyone selling the USD today needs to be aware of the risk that the Fed will eventually return to tighter monetary policy and that the long-term expectations of the US real interest rate that are priced in today will turn out to be wrong.”

“For USD exchange rates, this means that this ‘first discount effect’ is currently prevailing: the market’s growing confidence in its expectations of (long-term) USD interest rates is more important than the question of where exactly they are expected interest rates. . However, the market cannot be more than fully convinced. Once it is, it comes down to how low US interest rates are expected to be.”