Early Thursday morning Beijing time, the global market will usher in a major moment: the release of the Federal Reserve's September interest rate decision.
After months of debate among global investors over whether to cut interest rates by 25 basis points or 50 basis points in September, the Federal Reserve will finally reveal its final answer to the world.
As the "leader" among global central banks, the Federal Reserve's interest rate decisions have a profound impact on global financial markets. Sophia Drossos, a strategist and economist at Point72 Asset Management, a hedge fund, believes that the Fed's interest rate cut this time will be a significant moment, marking the official entry of the US dollar into a downward channel and boosting the economies of other parts of the world.
The Federal Reserve's interest rate cut will initiate a depreciation trend of the US dollar
According to the CME Federal Reserve Observation Tool, the market has basically concluded that the Fed will cut interest rates in September, but there are differences in expectations for the magnitude of the rate cut: last time it was believed that the Fed had a 65% probability of cutting interest rates by 50 basis points and a 35% probability of cutting interest rates by 25 basis points.
Before the Federal Reserve officially announced its decision, the expectation of a rate cut had already put pressure on the US dollar: August of this year was the worst month for the US dollar exchange rate this year.
DeRozos stated that as the Federal Reserve cuts interest rates, the US dollar will further weaken, benefiting all major currencies worldwide, with the euro and Brazilian real expected to see the largest gains.
This (Federal Reserve interest rate cut) is the beginning of a new trend of dollar weakness, "she said." As the Federal Reserve begins to cut interest rates, other central banks are also cutting interest rates, and we will see a stronger outlook for global economic growth
Other countries may not have relaxed as expected
In fact, there are also different views on Wall Street. Some analysts believe that even after the Federal Reserve cuts interest rates, the US dollar can still remain strong, as global economic weakness will force central banks around the world to accelerate the pace of interest rate cuts to boost domestic economic growth.
However, Drossos believes that the relaxation of monetary policy by central banks in many countries and regions around the world may be lower than expected.
Firstly, she expects that the European Central Bank's interest rate cuts will be slower than market expectations, which will provide support for the euro exchange rate.
In Brazil, the Brazilian central bank is expected to raise interest rates on Wednesday, which will obviously boost the real. DeRozos said that after this year's sales, the real currently looks very cheap and has a lot of upside potential.
In addition, recently, officials from the Bank of Japan have been making frequent hawkish comments, constantly sending signals to the market that interest rates will be raised soon. This has supported the upward trend of the Japanese yen exchange rate in the past two months.
Regarding the question of whether the Fed's interest rate cut this time will be 25 basis points or more, Delos expects that the Fed will choose a smaller rate cut (i.e. 25 basis points). If that's the case, it could trigger a subconscious reaction in the market, as many investors have already anticipated that the Federal Reserve will take even greater interest rate cuts.