Bloomberg’s dollar index fell for the fifth time in six days, reflecting market anticipation of a potential half-point rate cut by the Federal Reserve on Wednesday. The likelihood of this rate cut now exceeds 50%, according to market-implied probabilities. In addition to the rate decision, the Fed will release its long-term dot-plot forecasts, and Chair Jerome Powell is scheduled to hold a press conference.
In early trading, Japan’s Nikkei 225 Stock Average rose by as much as 1.3%, buoyed by a weaker yen which benefits the nation’s exporters. However, these gains were pared as the yen strengthened in Asia. Broader Asian markets showed mixed results as investors refrained from making significant moves ahead of the Fed’s decision.
“There are more questions than answers regarding whether the Fed will opt for a 25- or 50-basis-point cut,” noted Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “It seems like a day for caution, with many on the sidelines as they await the Fed’s announcement.”
The critical focus for traders is how investors will react to the Fed’s decision. A 25 basis-point cut might raise concerns about the Fed lagging behind economic conditions, while a 50 basis-point reduction could alarm markets, suggesting policymakers might foresee worse economic conditions than currently perceived.
Chris Weston, head of research at Pepperstone Group in Melbourne, remarked, “With the Fed meeting poised to introduce significant volatility, there are compelling reasons for potential buyers to stay on the sidelines. The day could see lighter trading volumes and a gradual decline.”
Bloomberg’s dollar gauge slipped 0.1%, extending its weekly losses to nearly 1%. The yen gained approximately 0.7% on Wednesday, recovering from a more than 1% decline in New York. The Bank of Japan, under Governor Kazuo Ueda, is expected to maintain current rates during its Friday meeting and discuss the potential for a rate hike later this year.
In China, chip-related stocks surged following news of a breakthrough in domestic chip-making technology. Shanghai Zhangjiang High-Tech Park Development hit the daily 10% trading limit, while Changchun UP Optotech and Sai Micro Electronics also saw significant gains.
Kristina Hooper at Invesco highlighted that Powell’s comments in the press conference could provide crucial insights into the Fed’s future rate cut trajectory and address recession concerns. Hooper anticipates a 25 basis-point cut and emphasizes the importance of Powell’s perspective on potential changes in the pace of easing.
Meanwhile, oil prices steadied in Asia after a two-day increase, with traders evaluating rising tensions in the Middle East, indications of higher US stockpiles, and the Fed’s anticipated policy direction. Crude oil prices had surged on Tuesday following reports of thousands being injured in what Hezbollah described as an Israeli attack in Lebanon involving pagers.
