Synopsis:

Credit Agricole expects the Federal Open Market Committee (FOMC) to implement a 25bp rate cut next week, with potential for a 50bp cut remaining a notable risk. The USD is likely to rebound following the rate decision, influenced by the Fed’s forward guidance and updated projections.

Key Points:

1. Rate Cut Expectations: Credit Agricole anticipates a 25bp rate cut from the FOMC, though acknowledges the risk of a larger 50bp cut. The focus will be on Fed Chair Jerome Powell’s comments, the updated dot plot, and staff forecasts.
2. Forward Guidance: Powell is expected to emphasize a data-dependent approach and maintain an outlook for a soft landing in the U.S. economy. The Fed’s guidance is anticipated to indicate a more front-loaded but not overly aggressive easing cycle for 2024 and 2025.
3. Impact on USD: If the Fed’s rate cut does not exceed the already dovish market expectations, it could signal a more moderate easing cycle. As a result, the USD is likely to recover, taking cues from U.S. rates and yields.
4. Market Reactions: More aggressive cuts might be viewed as inconsistent with a soft landing scenario and could even signal recession concerns, potentially impacting market sentiment.

Conclusion:

Credit Agricole predicts a 25bp rate cut from the FOMC next week, with the possibility of a 50bp cut as a risk. The Fed’s forward guidance is expected to support a gradual easing cycle, leading to a rebound in the USD as the market adjusts to these expectations. The USD’s recovery will likely be influenced by the Fed’s approach to future rate cuts and economic outloo