The DXY Index depreciated a third session by 0.4% to 100.76, approaching 100.55, the year’s weakest close on August 27. The futures market has increased the probability of a 50 bps rate cut at the September 18 FOMC meeting to 170% from 118% last Wednesday. Over the same period, the US Treasury 2Y yield eased by 9.1 bps to 3.551%, while the 10Y yield fell 3.6 bps to 3.618%. Conversely, economists polled by Bloomberg expect the Fed to mirror its peers and commence with a 25 bps reduction. 
US National Economic Council Director Lael Brainard backed the latter in her remarks to the Council on Foreign Relations on Monday. Brainard, a former Fed Vice Chair, reinforced the Fed’s assessment that the inflation was coming back down to normal levels without considerable dislocation in the labour market amid a sustained economic expansion. She attributed the inflation surge to supply chain shocks and disruption of commodities instead of overall excess demand. Expect Fed Chair Jerome Powell to emphasize tomorrow that the Fed was reducing top-level restriction in monetary policy to safeguard the labour market progress, downplaying the market’s recession fear linked to rising unemployment. Hence, the DXY could eventually move into a lower 90-100 trading range now that the UST yield curve (10Y vs. 2Y differential) was no longer inverted with scope to become more positively sloped.
USD/JPY traded briefly below 140, hitting 139.58 during the Asian session, before ending 0.2% lower at 140.62 overnight. Japan’s government bond yield differentials vs. the US continued to narrow, implying scope for USD/JPY to eventually trade in a lower 135-140 range. The Bank of Japan is set to reaffirm its commitment to keep raising interest rates through 2025 at its September 20 meeting, two days after the Fed delivers its first rate cut. Having attributed last month’s market volatility to US recession fears on a rising unemployment rate, BOJ Governor Kazuo Ueda will unlikely heed the call for restraint in raising rates by a leading candidate in the Liberal Democratic Party (LDP) party leadership race. Markets will scrutinize the Fed’s Summary of Economic Projections for upward revisions in the US unemployment rate forecasts north of 4.1% to lower the projected appropriate policy path for the Fed Funds Rate to the 3.6% projected last December vs. the 3.9% forecast in June.
Quote of the day
“The President made a clear commitment to respect the independence of the Federal Reserve in fighting inflation. This was an important contrast to his predecessor, who repeatedly criticized Federal Reserve monetary policy during the previous administration.”
Lael Brainard
September 17 in history
In 1683, Dutch scientist Antonie van Leeuwenhoek was first to report the existence of bacteria.
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