On September 12, the European Central Bank (ECB) cut interest rates by 25 basis points, as widely expected, but the market's reaction was somewhat surprising. Despite the rate cut being anticipated, the USD weakened, drawing attention to the upcoming Federal Reserve decision next week.
The U.S. Producer Price Index (PPI) and initial jobless claims data were released on the same day, largely in line with expectations, causing little immediate market movement. However, tweets by Wall Street Journal reporter Nick Timiraos stirred discussion. He mentioned that the Federal Reserve faces a dilemma: should they opt for a modest 25 basis point rate cut or a more aggressive 50 basis point cut? This sparked speculation that the Fed might lean toward the larger rate cut. Additionally, inflation data suggested that core Personal Consumption Expenditures (PCE) might continue to decline, further fueling the market's optimism and weakening the USD.
The market now largely expects the Fed to cut rates next week, though the size of the cut remains uncertain. There is a 25% chance of a 50 basis point cut being priced in. In addition to the rate decision, the Fed will release its dot plot, along with updated forecasts for economic growth, inflation, and employment. These projections will provide significant guidance for market expectations moving into 2025.
Among major currencies, the Australian dollar (AUD), New Zealand dollar (NZD), and British pound (GBP) performed strongly, benefiting from the "risk-on" sentiment and the USD's weakness. Meanwhile, the Canadian dollar (CAD) underperformed, showing little change by the end of the day.
The euro (EUR) also saw gains against the dollar. While the ECB announced its expected rate cut, ECB President Christine Lagarde did not provide a clear outlook on future rate decisions. The ECB revised its inflation forecasts slightly upward and downgraded its growth projections. Later in the day, ECB sources indicated that another rate cut in October is unlikely, with further cuts in December dependent on weaker economic growth. This uncertainty provided some support for the euro into the close.
In the stock market, the Nasdaq and S&P 500 indices rose for the fourth consecutive day, nearly recovering all of last week’s losses. Investor sentiment improved as the market returned to risk-taking, with optimism surrounding tech stocks.
In commodities, gold prices surged, reaching a new all-time high as demand for safe-haven assets increased. Meanwhile, Bitcoin also rose in value, reflecting investor interest in alternative assets as the USD weakened.
In summary, although the ECB's rate cut went as expected, market attention remains firmly fixed on the Federal Reserve’s upcoming rate decision. The USD's decline reflects growing market expectations of a more significant rate cut from the Fed. As risk sentiment improves, gold and cryptocurrencies have seen significant gains as investors seek refuge from potential dollar weakness.
