Will the Fed cause a US dollar collapse?
Explore how upcoming Federal Reserve decisions could impact the US dollar. With rate cuts anticipated as soon as September and major currencies gaining, the dollar faces potential devaluation.
First Fed rate cut in September
Fed funds futures now predict a 100% likelihood of a rate cut as early as the September meeting, a sharp pivot from expectations two months ago that foresaw no rate reductions in 2024. The market anticipates at least one 25 basis point cut, with the possibility of reaching 50 basis points by September, signaling a significant shift in Federal Reserve policy expectations due to changing economic data. Soft June CPI data was the most recent catalyst for greater rate cut speculation in market sentiment.
US Treasury yields near lowest levels 4%
In closely mirrored markets, yields on 10-year US Treasury notes have significantly declined, dropping from approximately 4.7% in May to 4.2% in July, effectively pricing in further rate cuts. Yields hit highs in May after several strong US data releases lowered the probability of any Fed cuts in 2024. This trend reflects a broader recalibration of risk and expectations in the US bond market, amid weakening economic indicators and growing trader anticipations of a more accommodative monetary policy.
US rates to hit 4.5% by 2025
Looking ahead, market sentiment captured by Fed Funds futures suggests a 62% probability that interest rates might fall to or below 4.5% by the December 2024 FOMC meeting. Such forecasts affect not only bond markets but inform forex and broad financial market expectations.
Major currencies gain on US dollar
The British pound, in particular, has staged a dramatic comeback against the US dollar, rallying more than 500 pips to approach the pivotal 1.3000 level, the highest mark seen in 2024. This reversal, among others, underscores the broader trends of US dollar vulnerability amid shifting rate expectations and ongoing economic assessments.
US employment worst since 2021
US labor market conditions have deteriorated recently, pushing the unemployment rate to 4.1%, its highest since late 2021. This rise in unemployment might compel the Federal Reserve to lower rates further in response to weakened job growth, adding another layer of complexity to the ongoing adjustments in US economic policy. Fed Chair Powell, however, has signaled the FOMC is not worried by this release and anticipates the labor market to stabilize around these levels.
Interest rates could tell you where USD is headed
The trajectory of the US dollar in the global currency markets may well hinge on whether the US can maintain its interest rate advantage. If these rates decline relative to other nations, the USD could potentially weaken further, altering cross-currency dynamics and affecting forex strategies globally. It should also be noted that this relative strength may depend just as much on the actions of other central banks as well, regardless of what the Fed decides in September and beyond.
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.