Will Dollar Smile at 25bps Cut, Morgan Stanley Asks by Investing.com

Investing.com – The U.S. dollar was hit hard by expectations that the Federal Reserve will kick off its rate-cutting cycle this week with a hefty 50 basis point cut, but that raises the possibility of a rebound should it a smaller discount was taking place, according to Morgan Stanley.

The US central bank begins its latest policy-setting meeting later in the session amid growing expectations that it will cut interest rates by 50 basis points at the conclusion of a meeting on Wednesday.

Traders are pricing in a 68% chance of a 50bps cut and a 32% chance of a 25bps cut, CME Fedwatch showed.

This sent the US dollar down to its lowest levels this year.

“Our US economists remain unconvinced that a 50 basis point cut is likely,” Morgan Stanley analysts said in a Sept. 16 note. of interest rate cuts of 75bp by the end of 2024, against market prices of ~115-120bp.”

U.S. bank economists also “do not expect the president to provide specific guidance on the pace of the cutting cycle … and are likely to remain data-dependent, indicating that future decisions will depend on available data.”

This result suggests that the Fed may not believe that currently available data warrants a faster pace of easing than 25 bp per meeting.

“This interpretation is likely to push the USD higher in the short term immediately after the meeting,” the bank added.

However, beyond the sudden reaction, we could see a split in the USD’s performance, with the lower heading but the USD heading higher against emerging markets and commodity currencies.