Lower FED Rate Cut Expectations, But the USD Is Not Benefiting
At the end of the year, the market expectations for FED rate cuts during 2024 stood at around 160 basis points of easing, which kept the US Dollar bearish for several months. However, strong economic indicators this year have led to a reduction in these expectations and a bullish trend in the USD.
Last year’s discrepancy between the Federal Reserve’s projections and the market’s expectations regarding interest rate cuts has closed. The Fed’s dot plot suggests a reduction of interest rates by 75 basis points for 2024, while the Fed funds futures market indicates expectations for 90 basis points in cuts which is the closes since October. Besides, these market-implied estimates may be distorted due to other risks. If we discount these distortions, there seems to be a great adjustment in the market expectations for the Fed’s projections.
But, that’s not helping the USD so much today. Last week the USD jumped higher after the CPI inflation report for January reduced rate cut odds, but the USD came back down. Today the USD is not advancing as rate cut projections fall, which is worrisome for USD buyers. This sort of price action indicates that this alignment may not last, as market sentiment has been subject to frequent shifts in response to economic data.
The previous week saw January retail sales decline, sparking concerns about potential seasonal adjustment difficulties that may have inflated the inflation numbers such as consumer inflation CPI and producer inflation PPI. This week, with a US holiday today, there’s a bit of a pause in US economic data releases. Consequently, market focus may shift towards other factors influencing the USD against other currencies. This shift in emphasis is apt given the lack of significant economic data releases and the observance of a holiday in the US.
EUR/USD Live Chart
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