With inflation steadily cooling and a slight rise in the unemployment rate, the U.S. Federal Reserve initiated a rate cut at the September FOMC meeting, cutting by 50 basis points, exceeding the expectations of most analysts. This is also one of the rare instances of such a significant rate cut in the Fed's history. Typically, such large rate cuts only occur during economic recessions or major crises, but the U.S. economy currently appears to remain relatively stable. With less than two months until the U.S. presidential election, some analysts believe that political factors may have influenced this action by the Fed. Following this large cut, the Fed's subsequent actions are expected to be more moderate, as further aggressive cuts would increase market expectations of a recession. The latest FOMC member projections (dot plot) suggest an additional 50 basis points of rate cuts this year, with 25 basis points at each subsequent meeting. The U.S. Dollar Index showed little change before and after the rate cut, fluctuating between 100.50 and 101.50. There is some support at the 100 level, but it seems unlikely to break above 102 in the short term.

The European Central Bank (ECB) also cut rates by 25 basis points at its September meeting. Although inflation remains stubborn, with the core CPI holding steady at 2.8% in August, weak economic growth is giving the ECB more motivation to cut rates. However, the scope for further cuts is limited. To reverse the downward trend of major economies in the Eurozone, former ECB president and former Italian Prime Minister Mario Draghi has proposed a report to the European Commission, suggesting an annual investment of at least 750-800 billion euros, equivalent to 4.4%-4.7% of last year’s EU GDP, exceeding the scale of the Marshall Plan post-World War II.

The Bank of England (BoE), meanwhile, diverged from the Fed and ECB by pausing its rate cuts at the September meeting and continuing its quantitative tightening program, reducing its bond purchases by 100 billion pounds. The British pound remained strong, breaking through 1.34 against the U.S. dollar, with a potential test of the 1.40 level on the horizon.

The Reserve Bank of Australia (RBA) also remained on hold, keeping rates unchanged for the seventh consecutive meeting, supported by relatively high inflation and historically low unemployment. In Japan, inflation accelerated again, with the CPI rising by 3% in August and the core CPI increasing by 2.8%. However, the Bank of Japan (BoJ) maintained its interest rates unchanged at this month's meeting, with Governor Kazuo Ueda indicating no rush to raise rates, taking a dovish stance. As the Fed begins its rate cuts, the BoJ faces less pressure and has more time to observe economic and inflation data before making further decisions. Additionally, Japanese authorities are not eager to see the yen appreciate too quickly, as this could negatively impact exports and tourism. With the Fed signaling limited further rate cuts, USD/JPY is expected to remain stable near the 140 level, with potential for upward movements. It may be worth considering buying USD/JPY on dips, with the possibility of reaching the 150 level again, while support should remain above 140.

Patrick Law

Chief Operating Officer of Hantec Group