The US dollar gained sharply yesterday after the Fed made a hawkish Pivot. The Reserve cut interest rates by 25 basis points, but Chairman Powell announced that the time is coming to halt the pace of cuts. The Fed hints at the possibility of cuts next year, but at the same time talks about the need for caution and the risk of inflation rebounding in the medium term. PCE and core PCE inflation are expected to rise to 2.5% in 2025, and the timing of the target itself is shifted to 2027. Economic growth is assessed somewhat higher, and of course interest rate expectations themselves have risen quite visibly upward.
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Open account Try demo Download mobile app Download mobile appFor next year, the Fed is pointing to two cuts to 4.0%, the market today has already more than priced in such a scenario. Source: Bloomberg Financial LP
The question then is what's next for the US dollar. For the moment, it seems that long-term the current interest rate levels and the uncertainty surrounding Donald Trump's presidency may support the US dollar. In the short term, however, it is worth remembering that the forecast of two rate cuts for next year has already been fully priced in, so it is not impossible that we will see corrections in the dollar in the short term.
The USDIDX Dollar Index broke out yesterday to local peaks of a broad consolidation zone that has been in place continuously since February 2023. A breakout of the November peak could cause the market to cover short positions en masse, further supporting the world's reserve currency. Source: xStation
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