The Fed just landed a punch, cutting rates by 0.25%—but the real fight begins now.
The Federal Reserve’s recent decision to reduce the federal funds rate by 0.25%, bringing it to 4.75%, has caught the market’s attention, with expectations aligning that this would occur as inflation nears the Fed’s target.
The cut, although modest, signals a shift in monetary policy, designed to support economic growth while maintaining a vigilant eye on inflation.
At first glance, it may seem like a subtle move, but this decision could have far-reaching effects across the global economy and U.S. markets.
At the heart of this decision lies inflation, which surged dramatically in 2021 but has since cooled down. The Fed’s preferred inflation gauge, the PCE index, has moved closer to the 2% target, allowing them some room to lower rates without reigniting inflation.
But there’s another factor on the Fed’s mind: the labour market. Even with unemployment remaining low, there’s a quiet concern that things could shift unexpectedly. Job markets are fragile in ways that are hard to predict, and the Fed wants to keep things balanced.
This cautious move, though subtle, is their way of ensuring that economic growth stays on track without overheating.
Things got more complicated with the election of former President Donald Trump. His victory adds a layer of uncertainty, especially with economic policies.
One of the most talked-about proposals is his plan for tax cuts, which could lead to a bigger federal deficit. A growing deficit would mean more government borrowing, putting pressure on the Fed to reconsider its interest rate strategy.
If the deficit grows, the Fed might have to adjust its bond-buying programs or manage rates differently to avoid long-term instability.
Trump’s stance on tariffs could throw a wrench into the works. If tariffs raise the cost of imported goods, inflation could rise again, which would challenge the Fed’s goal of keeping prices stable.
The Fed will have to juggle these policy changes, trying to keep inflation in check while also supporting growth. That’s no small feat.
With all of this in mind, market expectations have started to shift. The Fed had originally planned to reduce rates gradually, aiming for a range of 3.25% to 3.5% by the end of 2025.
But now, analysts are forecasting that the Fed may only reach 4.0% by that time. The reason for this more cautious outlook lies in the potential impact of Trump’s policies.
Tax cuts and tariffs could slow the Fed’s hand, forcing it to be more conservative in its approach.
The USDX has been showing upward momentum, rising from the monitored 103.90 level. As it pushes higher, traders will be closely watching the 105.60 region.
If price action begins to consolidate here, there could be potential for further upward movement, with the next target being the 106.10 area.
However, if the price starts to show signs of bearish pressure at 106.10, it could present a shorting opportunity, so market participants should remain alert to the developing patterns.
On the other side of the pond, the EURUSD has recently pulled back from the 1.0830 area, which was identified as a potential resistance zone. Should the pair continue to slide lower, the focus will shift to support levels at 1.0655 and 1.0620.
The SP500 continues to make new highs, with 6050 as the next resistance level. Further bullish momentum could lead to continued upward movement.
GBPUSD is dipping below 1.3030, with 1.2790 and 1.2700 acting as key support levels. A reversal here could provide buying opportunities.
USDJPY has dropped below 152.40, and 150.00 will be critical for potential bullish reversal signals. Any further decline could lead to continued bearish movement.
In commodities, USOil is still hovering below the 73.90 sell zone, but if it consolidates near 71.30, it could be a potential entry for shorts, while consolidation may suggest a buying opportunity.
Natural Gas is consolidating near 2.27, with a potential breakout in either direction. If price moves higher, bearish signals at 2.55 could prompt a short opportunity.
For precious metals, Gold is testing 2675 after dropping from 2710. A push higher could target 2750, but consolidation could lead to a further dip toward 2625.
On Monday, New Zealand will release its Inflation Expectations data, which could provide insights into the potential size of the next rate cut by the Reserve Bank of New Zealand.
Wednesday will feature the U.S. Consumer Price Index (CPI) year-over-year report, which is expected to show inflation holding steady at 2.4%. This data will be closely watched for any signs that the Fed’s monetary policy will be impacted.
On Thursday, Australia’s Reserve Bank Governor Bullock will speak, with traders looking for hints regarding the future trajectory of interest rates. The Australian Unemployment Rate is forecasted to remain at 4.10%, providing a check on the labour market’s stability.
Friday will see several key events, including a speech from U.S. Fed Chair Powell, where traders will look for clues on future interest rate decisions.
In the UK, the Bank of England’s Governor Bailey will speak, and GDP data for October will be released. The U.S. will also publish Retail Sales data, expected to rise by 0.3%, providing insight into current consumer spending trends.
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