Weak Payrolls + 0.4% CPI Spike → 0.25% Rate Cut
The bullish rally on Wall Street remains in progress, with the U.S. Dollar continuing to lose weight against the basket of rival reserve currencies. This happens with the clear understanding among the market community that the Federal Reserve's (Fed) decision today is essentially predetermined by the whole set of recent economic data. We are confident in the small first step reduction for the U.S. borrowing costs, from 4.25-4.50% to 4.00-4.25% on Wednesday.
The so-called Fed's "dual mandate" from the Congress includes only two goals, which are supporting maximum employment and stable prices. Weak U.S. jobs data of September 7, meaning only 22,000 new non-farm payrolls in August, and updates to the downside for the two previous months were well below average economists’ forecasts. Fed officials cannot remain inactive, as they need to cover their asses under those weakening conditions. Fed Chair Jerome Powell has already expressed their common concern about the U.S. labour market. But a sudden 0.4% MoM spike in the consumer price index (CPI) last week will help in justifying a small 25 bp slash instead of a larger 50 bp step down. In-line slice of the U.S. inflation pressure especially point to only a moderate rate cut by the Fed as the consumer inflation pace was much faster than 0.2% a month ago and also slightly above average forecasts of 0.3%. The annual inflation gauge came out at 2.9% for the last 12 months from September 2024 to August 2025, compared to 2.7% released in the previous month.
Weak jobs and persistent inflation are the two reactants that necessarily lead to a chemical reaction with a 0.25% rate cut in the sediment. The remaining space in the Fed decision vessel can be taken up by rhetorical water, which the markets are no longer of much interest to. Again, what the vast majority of the market expects from the Fed, the Fed always performs, so as not to rock the boat. The U.S. central banker's verdict couldn't be any different, because they are barely aimed at showing signs of panic like being ahead of entering recession. Indeed, any larger rate cut is relevant only in a near-recession scenario. Well, when this is highly likely confirmed by the Fed official statement in just a few hours, some minor technical volatility may take place on some stocks and major indexes, but no fundamental shake-ups or shake-downs are expected. After all, when the dust is settled, most market tools will continue to drive in the same direction they used to do it during the last several weeks.
The key role, therefore, is mentioned for the dot plot projections of the Federal Open Market Committee. As to the crowd's expectations, it should indicate two more interest rate cuts before the end of 2025. In fact, the same FedWatch tool demonstrates that 80% are expecting a second 0.25% slash at the end of October, and over 70% are betting on a potentially third rate cut move in mid-December as well. So, this so-far empty field in the Fed's statement seems pre-filled already, favouring the hand-rubbing bulls on Wall Street and the Dollar bears on major foreign exchange pairs.
If the Fed pledges two additional rate cut slashes on its dot plot for the remainder of 2025, then next and bigger objectives down to 92.50 for the U.S. Dollar Index (DX) vs the majors basket in for the next 4-6 weeks, will become quite realistic, with DX being traded at nearly 96.50 at the moment. Nearest target prices like 144 and even well below are possible for USDJPY in this scenario, as the slide of the Greenback against the Japanese currency has so far remained far behind the Dollar selling mood in US-European pairs like EURUSD, GBPUSD and USDCHF. Meanwhile, the prospects of 1.20 for the single currency or 1.40 for the Cable will depend mostly on the corresponding synchronous or asynchronous interest rate cuts by the European Central Bank and the Bank of England soon. Anyway, the door for the Greenback weakness would be wide open if the Fed becomes more dovish.
Meanwhile, the current rally in equity markets may be challenged by a very short-time correction, because of a "bought expectation, sold facts" scenario in some clearly overbought stocks. We expect that the Big Long mood will generally continue, as mid-caps are already supporting the AI flagships and other blue chips and may even further be encouraged with softening monetary conditions.
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