Dollar unloved, but perhaps not for much longer

As we predicted in our last look ahead, the dollar failed to make much headway this week despite what we see as constructive US fundamentals. Instead, the greenback continues to trade at the mercy of Fed expectations, and these are still pricing more than 100bp of Fed rate cuts this year. US CPI data did little to alter that narrative this week, despite beating expectations, while an ECB decision to cut rates by 25bps was similarly uneventful for the euro.

Next week, however, brings with it the event we have all been waiting for. The Fed will almost certainly begin to cut rates, we think by 25bps. This is likely to see a sharp shock to market expectations, which currently see a significant chance that the Fed will deliver a larger 50bp cut. Moreover, this surprise is likely to be compounded by a Summary of Economic Projections which we suspect will fail to endorse the 250bps of easing priced by markets by end-2025. If our expectations are met, the dollar should rebound next week – a 2% rally for the DXY index would not be out of the question. Outside the US, policy meetings for the BCB, Norges Bank, BoE, and BoJ should offer plenty of alternative entertainment too. But with the Fed set to take its turn centre stage, it is hard for us to look past the dollar as the most likely candidate for some explosive price action next week.

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Authors: 

Nick Rees, Senior FX Market Analyst

María Marcos, FX Market Analyst

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