Last week, I've laid out a case where the market could end up being "dead wrong" on interest rates expectations and that scenario is playing out.
The 10% baseline tariff rate on UK last week, kind of made me to turn up my nose, but the US-China announcement is much better than everyone expected and it will likely lead to positive global growth expectations.
The main point is that we've been hearing and seeing from the economic reports that businesses are cautious due to tariff uncertainty and that's holding back activity. With such positive resolutions, economic activity will pick up fast.
The Fed could be even more constrained because there will be upward pressure on inflation and the economic data will start to show a strong rebound in activity justifying a cautious approach to rate adjustments.
They will definitely deliver at least one rate cut, but they could end up with just that one cut in 2025. At the peak of the risk off sentiment last month, the market was pricing like 5 rate cuts by year-end and now we are back to 2 rate cuts (55 bps).
So, we are back to where we were before the April 2 announcement and how the economy evolves from now on will determine if we indeed get just one cut or the two the Fed projected in December.
All of this is of course a positive for the US Dollar in the short-term, especially since the USD short trade was one of the most crowded ones, but once we are done with the repricing in interest rates expectations, the focus will turn back to global growth and the positive sentiment could weigh on the greenback again.
This article was written by Giuseppe Dellamotta at www.forexlive.com. Read More Details
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