July FOMC preview: What a September rate cut could mean for USD
Find out how recent economic indicators and market expectations might influence the Fed's decision and impact the US dollar.
Key points
- The Federal Reserve will meet tomorrow, July 31st at 2:00pm EST to set overnight interest rates
- No change in rates is expected at this meeting
- Futures markets are pricing in a 100% likelihood of a cut in September
- US Inflation is lowering, though not yet to the Fed's 2% goal
- The US dollar could retain relative strength against major currencies as central banks globally begin cutting rates
No change expected in interest rates at tomorrow's FOMC
The Federal Reserve convenes tomorrow, July 31st at 2 PM EST, with widespread expectations that the target overnight rate will maintain its current range of 5.25 - 5.50%. This steady stance reflects a cautious approach as the Fed evaluates ongoing economic indicators and their implications on future monetary policies. Fed Chair Powell has made a strong effort not to surprise markets at each meeting, though his commentary following the meeting could signal the Fed's anticipated path forward.
The fight against inflation looks promising
In encouraging economic news, the latest CPI inflation data revealed a significant drop to 3% in June, marking the lowest level since 2021. Similarly, the PCE inflation rate has moderated to 2.5% in June, aligning with forecasts. These figures suggest effective management of inflationary pressures, enhancing prospects for economic stability. As the effects of restrictive monetary policy often lag behind each change in policy, the Fed is likely to begin reducing rates before inflation dips all the way to the Fed's target of 2.0%.
Markets pricing in 100% likelihood of a September rate cut
Current sentiment in the CME futures markets indicates a 90% probability of at least a 25bps rate reduction in September, with a 10% likelihood of more substantial cuts. Comments from Powell and the FOMC's assessment tomorrow could significantly influence these expectations, offering new insights into the possible direction of monetary policy.
What do rate cuts mean for US dollar
Typically, lower interest rates reduce the return on holding the US dollar, potentially decreasing its demand and value. However, the impact on the USD depends on relative rate actions by other central banks. If other regions enact similar rate cuts, the USD's relative strength might be preserved. Any unexpected shifts in the Fed's rate strategy, potentially hinted at in Powell's upcoming remarks, could prompt significant fluctuations in USD valuations. A key pair to watch will be USD/JPY, which could see a smaller interest rate differential if the Bank of Japan hikes this week.
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. Our curated playlists can help you stay up to date on current markets and understanding key terms. 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.