The FED started its rate hiking cycle in early 2022, eventually reaching 5.50% in June 2023. Since then, rates have remained at this peak for over a year. Today, this cycle is expected to end with the first rate cut since 2020. The FED typically signals its intentions before meetings through speeches from its members to prevent excessive volatility during FOMC meetings. Similarly, the entire market is now aware that the FED will cut rates today, but the size of the cut remains uncertain.
Market participants are divided on how much the FED will cut. A general market survey suggests a 25-basis-point cut, but both futures and swap markets are pricing in a 50-basis-point cut with more than a 50% probability. Due to this uncertainty, today’s decision may trigger increased volatility.
Another key point to watch is the market’s reaction to the decision. For instance, while a 50-basis-point rate cut would typically have a positive effect on the stock market, there’s a chance the market could react negatively, as such a cut might signal the U.S. is heading toward a recession and the FED is making a larger cut to prevent a deeper downturn. If a 50-basis-point cut occurs, Powell will likely attempt to calm the markets during the press conference. Depending on the success of his remarks, the market’s reaction could shift positively or negatively, or even lead to a whipsaw-like move.
Beyond the rate decision, markets will also focus on the projected rate path for the remainder of 2024 and 2025. The FED will update its projections during this meeting. Unemployment has already surpassed the June projections by 0.2%, and members will likely revise the 2024 unemployment projection to 4.4% or 4.5%. GDP and PCE projections are also expected to be slightly revised down. The main focus will be on the Federal Funds Rate projection, particularly the dot plot. I expect the FED to indicate a total of three rate cuts for 2024, including today’s cut.
(Dollar Index Daily Chart)
As markets prepare for the most uncertain FOMC decision of the year, the dollar index is testing a key support zone that has held back declines since 2022. The 99.50-101 range is a major support level, and unless it is broken, dollar bulls may step in to defend it. The dollar index has already priced in a 25-basis-point cut and perhaps most of the expected 50-basis-point cut, so any potential downside movement may remain limited unless this zone breaks.
(Dollar Index Daily Chart – Zoomed In)
Since peaking in late June, the dollar index has been gradually declining, with downward moves totaling nearly 2.50 points from local tops. If this pattern repeats, the dollar could extend its decline to 99.40, just below the key 99.50 level. This could present a good buying opportunity if there is a strong reaction from the 99.40-99.50 zone. However, in a highly volatile market, pulling the trigger too early might be risky, as a break to the downside could trigger significant selling pressure built up over the past three years.
While the repeating pattern suggests further downside, the latest bottom formation indicates a different potential outcome. The pattern has formed above the 100.50 support. If the dollar reacts positively from this support and breaks above 101.90, a move towards 103.66 could be expected in the coming days.
