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Hello everyone, today XM Forex will bring you "[XM official website]: The market has priced in a radical interest rate cut, the Federal Reserve has started easing but is cautious about the forward path." Hope this helps you! The original content is as follows:
On Wednesday, the U.S. dollar index fell for the second consecutive trading day, falling below the 99 mark and continuing to fall. As of now, the U.S. dollar index is quoted at 98.61.
Federal Reserve Governor Milan called for accelerating the pace of interest rate cuts, but the (single) rate cut does not need to exceed 50BP. He said that two more interest rate cuts this year is realistic; except for gold, no risk premium has been included in the market.
The Federal Reserve’s Beige Book: Consumer spending fell slightly and labor demand was generally sluggish.
U.S. Treasury Secretary Bessent: Plans to submit a list of three to four candidates to lead the Federal Reserve to Trump after Thanksgiving.
The media said that the Trump administration authorized the CIA to conduct secret operations in Venezuela, and Trump confirmed this news.
Trump threatens: If Hamas does not abide by the ceasefire agreement, Israel will resume operations on his order.
Trump: Modi assured me that India will not buy oil from Russia, but this will require a process.
Pakistan and Afghanistan have implemented a ceasefire.
The Federal Reserve has not been directly affected by the government shutdown. The overnight Beige Book report showed that U.S. economic activity has weakened slightly in the past eight weeks, which is consistent with Federal Reserve Chairman BobWill's message this week is consistent with the fact that the economic situation has not improved since the Federal Reserve cut interest rates by 25 basis points in September. It is currently very likely that the Federal Reserve will cut interest rates twice in 2025, and the possibility of another two interest rate cuts in 2026 remains to be seen.
Federal Reserve Chairman Powell acknowledged on Wednesday that job growth has slowed sharply, and yesterday Fed Governor Similan said that it has become more urgent for the Federal Reserve to quickly reduce interest rates to neutral levels. All of this confirms that even without key data, the Fed is still on track to cut interest rates by 25 basis points at the October and December FOMC meetings. The market expects that this interest rate cut will be accompanied by three more interest rate cuts in 2026, each time by 25 basis points.
ING fully agrees with the idea of two more interest rate cuts of 25 basis points each in 2025, but is slightly divided on the possibility of further interest rate cuts in 2026. On the positive side for the U.S. economy, loose financial conditions (lower federal funds rates, lower U.S. Treasury yields, and a weaker U.S. dollar) coupled with clarity on the trade situation have helped stabilize market sentiment, prompting zgykf.cnpanies to reinvest capital and resume hiring. In this case, there might just be one more rate cut, as the Fed currently forecasts.
Pessimistically, tariffs will have a greater impact on the economy, ultimately squeezing consumers' spending power and corporate profits. This will cause the job market to lose further momentum, with employment numbers starting to fall sharply, while a deepening slowdown in the housing market and a correction in prices add to downside risks. In this environment, the Federal Reserve will continue to cut interest rates in early 2026 and shift policy to stimulative areas. For now, our base case forecast remains somewhere in between, with ING expecting two more rate cuts in 2026, bringing the federal funds rate range to 3%-3.25%.
Federal Reserve Chairman Powell said at the annual meeting of the National Association of Business Economics that the economic outlook does not seem to have changed since the September FOMC meeting. We believed that although the weakening labor market was mainly driven by the supply side at that time, given its downside risks, the Fed would still decide to cut interest rates by 25 basis points at the October meeting.
In its last update of economic forecasts, the median dot plot pointed to two more rate cuts this year, although a sizable majority of zgykf.cnmittee members did not see the need for further rate cuts this year. With the quiet period about to begin, this public speaking opportunity is Powell's last chance to contradict market expectations before the October meeting, especially after two rate cuts have already been priced in. That he did not do so suggested that he expected consensus to be reached at the following meeting, prompting us to formally update our baseline forecast. We now expect the Fed to cut interest rates once at each of its October and December meetings, and by an additional 75 basis points next year, at a pace of 25 basis points per quarter, bringing the final cap on the federal funds rate to 3.00% by September 2026.
It’s just that we think the current political situationPolicy is not as tight as the FOMC appears to think, and the upside risks to inflation outweigh the downside risks to the labor market. This front-loaded easing path increases the possibility that the risk of upward inflation will materialize. Two important forward-looking arguments are: First, the U.S. artificial intelligence boom, although mostly interest rate insensitive so far, is increasingly relying on debt financing and may be further stimulated by lower interest rates. Second, monetary easing is taking place simultaneously with various forms of fiscal easing expected to be launched next year. The recent rise in inflation has been largely demand driven and is likely to be accelerated further by monetary and fiscal easing. Tariff-induced inflation will add additional pressure in the zgykf.cning year. This also means that we believe the risks to our Fed rate path are primarily biased to the upside.
Currently, the “surprise index” of the U.S. economy has begun to turn in favor of the United States, and the market’s pricing of artificial intelligence (AI) seems to only regard the producers of LLM (Large Language Model) as the main beneficiaries. While there is a case for dollar strength in this environment, the bigger picture is that the underlying dynamics are shifting and the dollar is continuing to diverge from its traditional dynamics. We believe that any strength in the US dollar, whether in a risk-on or risk-averse environment, will be short-lived as diversification themes will recur. We believe the U.S. dollar faces four key structural challenges:
1. Risk exposure and sell-off: The more investors believe in any emerging U.S. dollar strength narrative, the lower the hedging ratio will be. Once a new shock occurs and investors realize their mistakes and increase their hedging ratio again, the dollar will suffer a more violent sell-off.
2. The safe-haven status is questioned: Even if the global relative performance is tilted towards the United States, investors will gradually reconsider the hedging ratio of the US dollar. Because it's clear that the dollar's famous safe-haven dynamics in the Global Financial Crisis (GFC) don't hold true for every type of shock, especially against U.S. policy shocks. Although this change in perspective may take time.
3. Changes in growth expectations: Even if there are no external shocks, we expect Europe's economic surprise index to turn favorable in the first half of next year (H1), Japan's economy will also recover, and the CPI inflation pressure caused by the previous weakness of the yen will subside.
4. Central bank policy zgykf.cnparison: In this cycle, the Fed's ability to protect real returns will weaken, while the ever-vigilant European Central Bank (ECB) is ready to match any fiscal expansion momentum. "Easy fiscal and tight monetary policy" remains a zgykf.cnpelling narrative in European markets.
The yen gained slightly against the U.S. dollar and performed relatively strongly among G10 currencies as it embarked on an impressive rebound from eight-month lows. The spread between U.S. and Japanese Treasury bonds is narrowing, which provides fundamental support for the yen. However, which mainly reflects the market's dovish repricing of Fed policy, as market expectations for the Bank of Japan's policy remain weak after the previous Liberal Democratic Party election. Correlation studies highlight the dominant role of current market sentiment, with the yen's correlation with risk reversal indicators significantly stronger, while its correlation with interest rate spreads is relatively weakened.
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