The Fed Is Set to Make Its Move

The U.S. Dollar Index (DXY) has seen a slight decline of 0.30% to 100.61 points this week, while the EUR/USD pair climbed by 0.60% to 1.11400, nearing its recent high. Investors are keenly watching the Federal Reserve’s upcoming decision, speculating a possible half-point rate cut. This aggressive rate cut appears overestimated given the current mixed economic indicators, especially with core inflation showing some persistence.

The idea of a half-point cut is seen by some, like former New York Fed President William Dudley, as necessary due to potential labor market deterioration. However, other factors, such as the broader slowing of consumer and producer prices, make such a cut seem too drastic. Investors are wary of the implications: a half-point cut could temporarily weaken the dollar and drive stocks higher, but also stoke concerns about an economic downturn, which would likely strengthen the dollar later on.

Technically, if the EUR/USD falls below 1.10000, it may signal further gains for the U.S. Dollar. On the other hand, should the Fed opt for a smaller, quarter-point cut, the Greenback is expected to regain strength.

Large investors seem cautious, with only modest outflows of $2.7 million reported from WisdomTree’s USDU, reflecting a wait-and-see approach. The tension in the markets is high, and the outcome of the Fed meeting will likely set the direction for both the currency and stock markets.