We have lowered our forecasts for the USD and US interest rates. Barring shocks to the global economy and financial markets, we see the DXY Index resuming its depreciation into a lower 95-100 range through 2025 on the Fed’s rate-cutting cycle. This follows over 20 months of consolidation in a 100-107 range under the Fed’s “high for longer” rates stance.
On September 18, the US Federal Reserve reduced the upper bound of the Fed Funds Rate (FFR) range with a significant 50 bps cut to 5%. Based on our expectation for US GDP growth to become less exceptional at 1.7% in 2025 vs. 2.3% this year, we project a further cumulative 200 bps reduction in the FFR to 3% in 2025, a notable revision from our previous projection of 4%. This Friday’s US PCE deflators should validate Fed Governor Christopher Waller’s concern about inflation running softer than anticipated. Fed officials speaking this week will reaffirm the commitment to avert a further cooling in the US economy and labour market. The return of a positive US Treasury yield curve (10Y vs. 2Y spread) should weigh on the greenback with its steepening bias.
Conversely, the European Central Bank and the Bank of England did not lower their guard against inflation, showing little willingness to match the Fed’s pace of rate cuts. With their bond yield differentials leaning against the US, EUR/USD and GBP/USD have been supported above their psychological levels of 1.10 and 1.30, respectively, after mid-August. AUD/USD is also likely to hold above 0.68 on positive bond yield differentials, assuming the Reserve Bank of Australia defers rate cuts to 2025 at tomorrow’s meeting.
On September 26, the Swiss National Bank should lower rates a third time by 25 bps to 1%. Last week, the Swiss State Secretariat (SECO) for Economic Affairs forecast CPI inflation decelerating to 0.7% in 2025 from 1.2% in 2024, aligning with the SNB’s view that a strong CHF was curbing imported inflation and hurting Swiss exporters amid weak demand from Europe. However, USD/CHF may not break above its four-week range of 0.8400-0.8550. CFTC data suggested that its fall has been driven by an unwinding of short CHF positions, reflecting aggressive Fed cut expectations.
We do not expect the US Presidential elections on November 5 to support the greenback. Former President Trump’s popularity has diminished, with Vice President Harris gaining favour after their presidential debate on September 10. Unlike 2017 and 2021, the next presidential term, beginning in 2025, will coincide with Fed cuts rather than rate hikes. Additionally, the ballooning US federal debt over the last two presidencies will constrain the incoming administration’s economic policies.
Quote of the day
“Republics decline into democracies and democracies degenerate into despotisms.”
Aristotle
September 23 in history
In 1970, IBM announced the first computer to employ semiconductors for its main memory.
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