A more aggressive cut to stimulate the economy comes with risk—but there are opportunities for savvy traders to take advantage of. Read the article to learn about smart trading moves you can make to seize the opportunities.
During his speech at the Jackson Hole Economic Symposium, Jerome Powell made it clear that a rate cut is likely on the horizon.
“It’s time for policy to adjust,” Powell stated, adding that “the direction is clear,” but the timing and pace of any cuts will depend on economic data, the outlook, and risks facing the economy.
While Powell did not provide a specific rate cut figure, his comments suggested that the Federal Reserve is ready to modify its policy to prevent further economic weakening and to guide the U.S. economy toward a “soft landing.”
Interest rate cuts can help boost the economy by making borrowing cheaper, but they can affect market sentiment in different ways.
A smaller cut (25 basis points) might be viewed as a careful move that keeps investor confidence steady without causing alarm.
On the other hand, a larger cut (50 basis points) could drive quicker economic growth but might also raise concerns about economic risks. Powell mentioned that a larger cut could be on the table if the job market is in serious trouble, aiming to prevent further cooling of labour conditions.
Recent data shows that inflation is gradually cooling, which provides the Fed with more flexibility to adjust its monetary policy. After more than a year of keeping interest rates at 5.3%—the highest level in over 20 years—Fed officials are now expressing more confidence about moving toward a rate cut.
As Jerome Powell highlighted, “upside risks to inflation have lessened,” indicating that the central bank is preparing to ease rates in the near future.
Another crucial element the Fed is monitoring is a range of economic indicators, including GDP growth, employment figures, and consumer spending. While inflation has moderated, the job market is starting to show signs of strain. Unemployment has ticked up slightly, raising concerns about labour market conditions.
Powell emphasised that the Fed’s decision on when and by how much to cut rates will heavily depend on the evolving data and the broader economic outlook, which includes growth prospects and potential risks to financial stability.
A significant rate cut could stir concern among investors if they interpret it as a sign of underlying economic trouble. However, recent market reactions have been positive, with the S&P 500 approaching record highs and government bond yields falling as investors increasingly anticipate a shift in Fed policy.
While the central bank aims to guide the economy toward a “soft landing,” it must balance its policy adjustments with the need to maintain market confidence.
Technology stocks could see a boost if the Fed moves forward with rate cuts, as lower borrowing costs often support growth sectors like tech.
Source: Barron’s
The AUD/USD pair is steady around 0.6640 as the U.S. Dollar loses strength. Traders are now focusing on the upcoming Fed meeting, where rate cuts are expected to increase pressure on the USD.
In contrast, Australia’s strong employment data is providing support for the AUD, signalling that inflation could remain high. This leaves the Reserve Bank of Australia in a tough spot, even as the Fed prepares to ease rates.
For a detailed analysis, check out: Australian and New Zealand dollars hold ground as risk sentiment stabilises
With Jerome Powell hinting at upcoming rate cuts, CFD traders have a prime opportunity. A rate cut could boost tech stocks, making long CFD positions in this sector potentially profitable.
Additionally, as the USD weakens, traders might short USD-based CFDs, such as AUD/USD, to benefit from currency shifts. By staying alert to the Fed’s moves, traders can leverage CFDs for short-term gains on these anticipated market changes.
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