In mid-September, the Fed cut interest rates by 50 basis points – the first time the headline rate had been reduced since March 2020. Expectations of the timing and scale of further reductions vary, with Fitch Ratings expecting 25bp cuts at the November and December meetings, followed by four more 25bp cuts through 2025.
Given the impact of interest rates on currency demand, FX market participants watch monetary policy very closely. Higher interest rates increase the attractiveness of a country to foreign investors and this increases demand for (and therefore the value of) the domestic currency, in this case the dollar.
Election outcome will impact rates
The outcome of the November US presidential election will be key to determining interest rate movements, with many bank strategists expecting rates – and the dollar – to rise in some scenarios, especially if the Republicans end up with a majority in both the senate and the house of representatives.
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If Trump gains control of both chambers, the expectation is that he will implement strong tariffs that would increase inflation expectations, push up interest rates and see the dollar appreciate against most currencies.
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