Global Markets Brace for Fed’s First Rate Cut Since 2020: 25 or 50 Basis Points?

The first U.S. interest rate cut since 2020 will be a groundbreaking event for markets worldwide. The crucial question, however, is its magnitude. The markets still increase their bets on a significant movement of the Fed (by 50 bp) in this week, currently over 60%. We find this assessment excessive – we expect a cut of 25 bp. This could potentially result in a tactical strengthening of the dollar in the short term.

Key Points:

• The ECB, as expected, cut interest rates; it also hinted that it is not planning any rate cuts in October.
• The Fed is expected to make the first in a series of cuts this week – the exact magnitude remains a question.
• The BoE will maintain its interest rates at their current level.
• The złoty remains in a lateral trend, dependent on external stimuli.

Last week, investors increased their bets on a 50 bp cut, which resulted in the weakening of the dollar against most other G10 currencies. Risky assets worldwide appreciated and the main stock indices were close to record values. The best performing currencies were those of Latin America, such as the Chilean peso, Colombian peso, Mexican peso, and the Japanese yen, which has recently become exceptionally sensitive to US interest rates. The złoty continued to move laterally.

This week, market attention will focus on the Federal Reserve’s September meeting (Wednesday 18.09). It will be crucial whether a cut of 25 or 50 bp will occur. Regardless of the scale of the move, the dot plot, new economic projections, and the press conference of President Jerome Powell will also pique interest. On Thursday (19.09), the Bank of England will hold a meeting – consensus suggests that due to persistent inflation and resilient demand in the UK, there will be no change in interest rates.

PLN

In recent days the EUR/PLN rate at one point reached 4.30, but the week ended at almost the same level as it began. The złoty, thus, fared better than other regional currencies. Floods in southwestern Poland so far have not had a significant impact on the currency market, with attention focusing on news from abroad.

This week’s calendar is more crowded, with particularly important data on the labour market and industrial production readings being released on Thursday (19.09). However, the most crucial event for the Polish currency will likely be the Federal Reserve meeting, which provides some guidance for banks worldwide, including the NBP.

EUR

Last week, the European Central Bank, as expected, cut interest rates and provided little information on their future trajectory, suggesting that another cut at the October meeting is unlikely. Market valuations, like those for the Fed, changed following this and currently place about a 30% probability on such a move. We do not anticipate this happening.

Poor industrial production will influence the decision less than persistent inflation and relatively generous wage deals, as Germany’s industrial sector problems are structural and not directly linked to the level of interest rates.

USD

Price dynamics in the US were higher than expected – its core measure rose for the second consecutive month, by 0.28%. The 3-month moving average of core inflation, which we prefer, has stopped falling and started rising, albeit still close to the Fed’s target.

Markets, however, ignore these readings and the further evidence that the labour market is not significantly deteriorating, and continue to increase their bets on a significant Fed move this week, currently around 60%. We believe this assessment is excessive. We still expect a 25 bp cut and, as a result, see the potential for a tactical strengthening of the dollar in the short term.

GBP

We foresee a very active week in pound trading. The inflation report for August will be published on Wednesday (18.09), followed by the Bank of England meeting on Thursday (19.09) – in our view, the gap between these events is too small for the first to have a significant impact on the latter. Economists are almost certain that interest rates will remain unchanged, but the markets estimate about a 20% chance of a rate cut.

Authors: Enrique Díaz-Alvarez, Matthew Ryan, Roman Ziruk, Eduardo Moutinho, Itsaso Apezteguia, Michał Jóźwiak – Ebury analysts