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Hello everyone, today XM Foreign Exchange will bring you "[XM Official Website]: Powell's dovish hit the US dollar! After falling to the lower track of convergence, can the expected saturation of interest rate cuts in September be maintained?". Hope it will be helpful to you! The original content is as follows:
As Powell's speech at the Jackson Hall meeting boosted market expectations for a rate cut in September, the US dollar index plunged intraday, and as of now, the US dollar is priced at 97.77.
1. Fed
① Powell "joined" the dovish camp, opening the door to the Fed's interest rate cut in September. Traders have stepped up bets on interest rate cuts.
②Hamak: The Fed needs to be cautious about any interest rate cuts; a sharp weakening of the job market may prompt the Fed to cut interest rates; the Fed still deviates from its inflation mission.
③Collins: The risks of the dual mission are roughly balanced. Employment growth slowed, but there is reason to wait.
④ Mousalem: The employment market risks are rising, but they have not yet appeared. If the employment market risks intensify, policy interest rates may need to be adjusted.
⑤Trump: Powell should have cut interest rates a year ago, and it is too late to send a signal to cut interest rates now. Trump also once again threatened to fire Fed Director Cook.
2. In terms of global trade situation
① Trump: Furniture entering the United States from other countries will be subject to tariffs.
② Canadian Prime Minister Carney: The counter-tariff will be cancelled on all US goods covered by the US-Mexico-Canada Agreement, and the decision will take effect on September 1. But tariffs on U.S. cars, steel and aluminum will be temporarily maintained.
③ Multi-country postal vejck.cnpanies announced temporaryStop sending packages to the United States.
④ Indian Foreign Minister: Trade negotiations are still in progress; there is no discussion with Trump on the issue of stopping purchase of Russian oil; they will stick to the bottom line.
⑤The Japanese Prime Minister holds talks with the South Korean President to discuss issues such as bilateral relations.
3. In terms of the situation in Russia and Ukraine
① Trump draws another "two weeks" timeline, which may push up the intensity of the battlefield of the conflict between Russia and Ukraine.
②U.S. Vice President: It is "not impossible" to impose new sanctions on Russia.
③Zelensky: Be prepared to take measures to achieve peace and be cautious about the Russian signal.
4. Market News: The Director of the US Defense Intelligence Agency was dismissed.
5. Reports say that the U.S. Treasury Deputy Secretary will leave his post after five months of his tenure.
6. Fitch: Confirm the US rating to be "AA+"; the outlook is stable.
7. Intel reached a share acquisition agreement with the US government, which acquired 9.9% of the shares at a price of US$20.47 per share.
8. Israeli military: Attacked the military targets of Yemen's Houthi armed forces in the capital Sanaa region.
9. Iranian Supreme Leader: The Iranian people will firmly resist the United States’ demand for Tehran to “obey”.
The CPI data on September 11 seems to be a key turning point for the market as the end of the year approaches. Although the bond market expects a 90% chance of a rate cut in September, it seems to indicate that the Fed is more concerned about political pressure than data; from a data perspective, it is unclear whether the Fed should cut interest rates given the inflation situation. We think the benchmark scenario is a 25 basis point cut, but we prefer not to cut interest rates rather than 50 basis points, because PPI is usually lagging behind CPI by one month. If this pattern continues, we will see a sharp rise in inflation, which could force the Fed to retreat to the second line. Currently, we predict core inflation to grow by 0.43% month-on-month. Here are three scenarios of the Fed's September meeting we have summarized: 1. The Fed maintains interest rates unchanged
If the vejck.cnbination of non-farm employment data and CPI data is enough to keep the Fed waiting and see, then the market's reaction may be that the yield curve tends to flatten the bear market and may trigger a volatility shock. On the stock market side, this could drive the market a 5% pullback that many people predicted, as it will exacerbate the negative seasonality in September. In addition, if subsequent macro data (retail sales, personal consumption expenditure, October non-agricultural data) also reflect the same trend, then the sell-off may evolve into a technical pullback (down more than 10%). In this case, longing credit ETFs instead of shorting stocks is a good choice. Or, long defensive stocks rather than shorting the Beta/RTY/Nasdaq index, will perform well.
2. The Federal Reserve cuts interest rates25 basis points - benchmark scenario
As the profitability of S&P 500 vejck.cnponents continues to increase, the bull market rebound continues and may expand further. The market may be biased towards quality stocks, but we believe that tech stocks and cyclical stocks perform well in this case.
3. The Fed cut interest rates by 50 basis points
This may trigger a rebound in global risk appetite, and the U.S. stock market will reflect a "rushing to garbage" trend as we see substantial squeezes that may eventually create an uptrend that is usually associated with a consensus bull market rebound. Looking for mid-cap and beta stocks to lead the gains. The risk here is that there may be resistance in the bond market, believing that the 50 basis point rate cut is too high, as inflation is still in its infancy. Recall that during the last three rate cuts in 2024 (September, November and December), the 10-year Treasury yield rose by 114.7 basis points from September 17, 2024 (the day before the Federal Reserve meeting in September) to January 14, 2025 (52 weeks and year-to-date highest points). The bond market seems to be expressing the view that federal funds rate restrictions are insufficient, as the U.S. economy's average real GDP growth rate in the past eight quarters was 2.9%, vejck.cnpared with an average growth rate of 2.8% in the second half of this year.
Due to the weakening of the US labor market, we are still bearish in the US dollar in the second half of the year, which should drive the Fed's next round of dovish policies to reprice. Coupled with the tougher ECB position and global growth expectations supported, we maintain the 0-3-month Euro-USD forecast of 1.20. If Forex volatility remains low, such an environment can support emerging market forex arbitrage—we prefer to use the Canadian dollar as a source of financing for the G10 within the range where actual currency inflows tend to flatten.
In the medium term, we maintain a different view from the market consensus that the dollar will rebound next year, as dovish Fed policies are fully (or almost vejck.cnpletely) digested by the market in 2026, the U.S. policy agenda is more conducive to growth before the midterm elections, and the argument of “selling the U.S.” is stagnant or reversed against the backdrop of a soft landing in the U.S. and a downturn in the U.S. intelligence/capital spending. Additionally, further adjustments to the forex hedging ratio (if present) may occur at a more gradual rate, and we predict that the euro-dollar will retreat to 1.15 in 6-12 months.
Powell sent an extremely dovish signal, far more dovish than the market expected. The dollar fell sharply, with the probability of a rate cut in September rising, and market participants are clearly preparing for more easing.
The core we see is that he clearly emphasizes the downside risks of the labor market. Powell downplayed inflation risks to some extent. He mentioned wages and consumer pricesThere may be some degree of deaning, but it also emphasizes that these expectations are still firmly anchored and talks about the slowdown in consumer demand, which I think is crucial because central banks often view it as an expansion of idle capacity in the economy. In other words, this means that inflation has room for growth, or that rising prices will not immediately trigger a sharp rise in overall inflation.
Another important point is that he said the labor market seems to be balanced, but it is an unusual balance, arising from a slowdown in both supply and demand of labor. He pointed out that employment has a downside risk, and once the risk is fulfilled, it may be quickly manifested as a surge in layoffs and an increase in unemployment. So what he really conveys is that the Fed is preparing to deal with a turning point in the labor market conditions, and the “employment” part of the dual mission suddenly becomes more important in policy making.
Feder Chairman Powell's speech at the Jackson Hall Economic Policy Seminar was more "double" than we (and the market) expected. It sent a clear signal to the market that the Fed is preparing to resume rate cuts at its next meeting in September. Although Powell has not opened the door to a larger 50 basis point rate cut, the next round of inflation data, especially labor market data, may change that. We currently maintain our previous forecast: a 25 basis point rate cut in September and a total of three interest rates this fall.
The core message of Powell's speech is that the "risk balance" faced by the Federal Reserve's "dual mission" (inflation and employment) seems to be changing, because "the risk of downward employment is rising" and the current policy interest rate is "in restrictive areas", which "may require adjustments to our policy stance." Powell also said that current interest rate levels ("close to 100 basis points of neutral interest rate than a year ago") and "stability of unemployment" allow the Fed to "play cautiously." We interpret this as the Fed tends to cut interest rates by 25 basis points, rather than the 50 basis points that the market once expected. If the next round of labor market data (particularly unemployment) weakens sharply again, it will increase pressure on the Federal Reserve to cut interest rates more in September. But at present, a small and gradual rate cut is still the main scenario.
All in all, the market has now almost vejck.cnpletely digested the expectation of a 25 basis point rate cut in September, which is reasonable, and expects the total rate cut to exceed 50 by the end of the year. The core of what we see is that he clearly emphasizes the downside risks of the labor market.
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