Barclays: The dollar will rebound by 1% ahead of the Fed's decision
Barclays foreign exchange strategist Skylar Montgomery Koning predicts that the US dollar will rebound by 1% before the Federal Reserve interest rate decision. The reason is that traders have overestimated the rate cut magnitude and underestimated the upcoming retail sales data. She believes that stronger-than-expected retail sales will prompt market adjustments, benefiting the US dollar as a result. The current market uncertainty about the Fed's rate cut has reached the highest level since 2007, with an expected rate cut of 25 basis points
Barclays foreign exchange strategist Skylar Montgomery Koning said that the US dollar is about to rebound because traders have overestimated the extent of the Fed rate cut and underestimated the retail sales data released on Tuesday.
She predicts that stronger-than-expected retail sales will change market expectations, leading to a shift towards a smaller rate cut, thereby boosting the US dollar. With only two days left until the Fed interest rate decision, traders' uncertainty about this decision is at its highest level since 2007, and this consumer report is one of the last pieces of information before the rate announcement.
"We expect the data to be stronger than consensus, and last month's retail sales data was also very strong," Montgomery Koning said in an interview. "This may lead the Fed to lean towards a 25 basis point rate cut."
She predicts that the Bloomberg Dollar Spot Index may rise by 1% on this news, with most of the gains coming from the euro.
The market has been balancing the possibility of a 25 basis point rate cut and a 50 basis point rate cut by the Fed in September, and often reacts to new economic data. Investors also expect Fed Chairman Powell to provide guidance when announcing the rate decision on Thursday and update the Fed's economic forecasts.
The US dollar index fell by as much as 0.4% on Monday, hitting its lowest level since January. The euro rose by about 0.4% on the day, and the pound outperformed other currencies in developed economies, rising by 0.6%.
Barclays expects the Fed to cut rates by 25 basis points three times this year as the US economy remains strong.
Economists generally expect last month's retail sales to decline due to weak auto sales. If this trend continues, it will support the view that the recent slowdown in the labor market will translate into more cautious consumers.
However, Montgomery Koning said that the market tends to overreact to rate cut expectations. She said:
"During those soft landing periods, if you look at historical data, the market always overestimates the extent of the Fed rate cuts, and when expectations reach a turning point, the dollar will rebound."