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Hello everyone, today XM Forex will bring you "[XM Group]: Powell's dovish stance may end the dollar's rebound, and the October interest rate cut plan is steadily advancing." Hope this helps you! The original content is as follows:
On Tuesday, the U.S. dollar index stayed just above the 99 mark, and finally closed down 0.21% at 99.056. U.S. bond yields have generally fallen, with the benchmark 10-year U.S. bond yield hitting 4% for the first time since September 17. As of now, the U.S. dollar is quoted at 98.88.
Federal Reserve——①Powell: Liquidity in the money market is gradually tightening, and the balance sheet reduction may be llfzg.cning to an end in the next few months; recent economic activity data are stronger than expected, but have not yet This translates into a pick-up in hiring, and the downside risk to the job market increases; (interest rate cuts) are taken too slowly and may suppress employment, while actions taken too fast may cause the anti-inflation task to be abandoned halfway; under the government shutdown, it is believed that there is still enough llfzg.cnrmation for reference in the interest rate discussion at the end of this month, but there are concerns about missing October data.
②Bowman: Continue to expect two more interest rate cuts before the end of this year.
US media: The United States will announce its national security strategy within a few weeks.
Trump: Dissatisfied with Spain and considering imposing trade penalties on Spain.
Trump will announce on Friday a list of Democratic-supported projects to be closed over the shutdown.
The French Prime Minister proposes to suspend pension reform.
The IMF raised its global growth forecast for 2025, saying Trump's trade war may drag down global output.
The U.S. government shutdown has disrupted the flow of important economic data used by the Federal Reserve to guide its monetary policy. It also means traders lack the usual tools to predict the Fed's next move. This uncertainty has supported the dollar as markets believe the lack of data means the Fed will not take action - at least not at its upcoming meeting. It was not until overnight that Federal Reserve Chairman Powell confirmed that the October interest rate cut plan is still in progress and that quantitative tightening (QT) may be llfzg.cning to an end.
Powell said that while data before the government shutdown showed that economic growth may be stronger than expected, he noted that downside risks to the U.S. job market have increased. He acknowledged that the government data they lack is the "gold standard," but added that the Fed could obtain private data sources as an alternative. With Powell now signaling that quantitative tightening may be llfzg.cning to an end, the case for further rate cuts next year appears to be strengthening. Bullish momentum in the U.S. dollar is also fading.
The current rebound in the US dollar is a corrective one, and bears may be better off waiting for evidence of a swing high at higher levels. Given the importance of the 100 mark, this level may be a difficult nut to crack. With the prospect of an end to quantitative easing and the possibility of a rate cut still looming, analyst Matt Simpson suspects this corrective rally may be closer to the end than the beginning. In the meantime, also keep an eye on the TACO trade, as the latest trade dispute may wind down before the summit, so the market may continue to look for more evidence of a short-term peak in the US dollar.
The key message the market got from Federal Reserve Chairman Powell’s speech overnight was that he did not question the market’s expectations for an interest rate cut at the October meeting. Instead, he suggested the Fed was still on track to cut interest rates, noting that a weak labor market could be grounds for a rate cut even if inflation remains elevated. At the same time, he said that both the labor force and demand have fallen sharply, pointing to the risk of further weakness in employment, but he highlighted the risks of cutting interest rates too quickly (leaving the inflation problem unsolved) and too slowly (leading to job losses).
Another key message is that Powell suggested that this quantitative tightening measure may soon end as the banking system's reserves shrink as the Fed's balance sheet has shrunk from nearly $9 trillion to $6.6 trillion since mid-2022. The Fed plans to take a cautious approach to avoid a repeat of the money market turmoil caused by excessive reserves losses in 2019. The above points in Powell's speech are generally negative for the dollar, with dollar bulls pausing the recent recovery process to consolidate recent gains.
According to a report from Standard Chartered Bank, if the market predicts further interest rate cuts by the European Central Bank,The euro is likely to weaken in the llfzg.cning months as the outlook heats up. Strategists at the bank said that although the European Central Bank has shifted to an accommodative stance, the market may price in another interest rate cut by the European Central Bank as early as December, especially if inflation continues to be below the 2% target. The bank added that additional rate cuts could llfzg.cne in 2026 if price pressures remain subdued. In addition to monetary policy, the euro faces other headwinds, including U.S. tariffs that threaten euro zone exports and growth, as well as internal challenges such as political uncertainty in France and slowdowns in German fiscal allocations due to bureaucratic procedures. Standard Chartered expects EUR/USD to fall to 1.13 by the second quarter of 2026 from its current level of close to 1.17, as growth concerns and policy divergence continue to put pressure. (Golden 10 Data APP)
The structural differences between the labor markets in the United States and the Eurozone are significant, which has a major impact on their respective monetary policy paths.
In the United States, low labor force participation means the labor market remains tighter than the recent slowdown in hiring activity suggests. The Fed acknowledged that the slowdown in job growth is partly attributable to supply factors, but its main concern is that weak demand will play a larger role going forward. Consistent with this, although the unemployment rate has rebounded from cyclical lows, it has not been significant. The current level of 4.3% is still basically in line with the equilibrium interest rate estimated by the Federal Reserve. In this environment, wage growth has been hovering in the 3.5% to 4.0% range, with no obvious downward trend. This wage growth is consistent with the 2% inflation target only if productivity grows by at least 1.5% per year. While this condition is currently being broadly met, supply-side issues leading to structural tightness in the labor market increase the likelihood that inflation will remain above the Fed's target for the foreseeable future.
On the other hand, in the Eurozone, as the negative supply-side shocks caused by the epidemic and the war in Ukraine have dissipated, overall inflation has quickly approached the European Central Bank's (ECB) price target of 2%. Higher labor force participation is supporting slower wage growth. Current wage growth is mainly driven by a lagged response to falling inflation and weak employment dynamics. Throughout 2026, slower wage growth is likely to trigger a new decline in core inflation, pushing it below 2%, fully consistent with the ECB's price stability mandate. If there are any risks, the risks to the euro area's medium-term inflation outlook are more to the downside than to the upside.
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