The Federal Reserve is likely to begin cutting interest rates in September, according to the minutes from their July meeting. This shift in stance comes as inflation cools and the labor market in the United States slows. Markets are anticipating a rate cut in September, with a 62% probability of a 25 basis point reduction and a 38% probability of a 50 basis point reduction. The euro has surged against the US dollar, reaching its highest level since July 2023.
As the Fed looks to cut rates, market participants will closely watch the European Central Bank’s decision on September 12th. The ECB may consider further loosening its monetary policy following the Fed’s dovish turn. While the ECB is expected to reduce its benchmark interest rates by 25 basis points, a deeper rate cut is unlikely due to persistent inflation in the Eurozone.
Meanwhile, the Fed may need to implement further cuts to address a deteriorating labor market. The US nonfarm payroll showed a slowdown in job growth in July, with the unemployment rate rising to 4.3%. Inflation also slowed down, raising concerns about the overall economic health.
Analysts anticipate that the Fed will implement a total of 100 basis point cuts this year, while the ECB is expected to make smaller cuts, potentially leading to a surge in the euro against the US dollar. This surge could impact exports and further weigh on manufacturing activity. As central banks around the world join the rate-cutting cycle, the value of their currencies will continue to be influenced by these trends.
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