Interest rate cuts: when, how much, and what it means
Key points
- Markets are currently pricing in a 68% chance of the Fed cutting rates by 100 basis points or more in the next year¹
- May 24th could be the first FOMC meeting in which rates are lowered²
- US dollar depreciated on soft inflation data
With hikes unlikely, when will interest rates lower?
The recent shift in market expectations for interest rates has been significant. Just a few months ago, futures markets were pricing in an additional hike by the Federal Reserve in 2023, but now the focus has shifted to potential rate cuts.
Looking a full year out (December 2024), markets are predicting the likelihood of rate cuts 100 basis points or greater to be 68%¹. The same futures data tells us that the first rate cut will most likely take place at the FOMC's May meeting². The timing of such rate cuts is especially sensitive to economic data releases as the Fed will try its best to avoid a recession.
Rate expectations' impact on the dollar
The recent decline in the US dollar can be attributed to the changing expectations for interest rates. As the market prices in lower rates, the dollar has weakened against other currencies like the pound and the euro. USD had its worst day of the year against GBP and EUR on Tuesday after lower-than-expected CPI data.
However, it is important to note that these market dynamics can change quickly. Inflation could rise again, leading to a reversal in interest rate expectations and a strengthening of the dollar. The dollar's performance is also contingent on other global economies. If economic conditions in the US's worsen less than countries in Europe or Asia, the dollar may still appreciate due to relative strength.
¹Projections based on the CME's FedWatch tool for 12/18/2024
²Projections based on the CME's FedWatch tool for 5/24/2024
How to trade US dollar
- Open an account to get started, or practice on a demo account
- Choose your forex trading platform
- Open, monitor, and close positions on USD pairs
Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.
You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.
Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.
Why do interest rates matter to forex traders?
Interest rates impact forex markets because they determine the cost to hold or borrow currencies overnight. The differential between interest rates can cause greater demand for a certain currency over the other.
What does the Fed control?
The FOMC controls the Overnight Rate, or Federal Funds Rate, to target monetary policy. This rate is used by large banks each night as a cost to borrow into the next day. This cost to borrow often influences longer-term interest rates like mortgage rates and student loans.
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