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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange]: Countdown to the Federal Reserve's resolution! Milan Cook's voting rights triggers a 'four-party melee'". Hope it will be helpful to you! The original content is as follows:
On Tuesday, the US dollar index fell to its lowest level in more than 10 weeks, and as of now, the US dollar is quoting 96.70.
The monthly retail sales rate in the United States in August was 0.6%, higher than the forecast median value of 0.2%, and the previous value of 0.50%.
Trump filed a $15 billion defamation lawsuit against the New York Times.
The Trump administration will appeal the court's ruling against Fed Director Lisa Cook.
Milan was sworn in as a Fed director before the Federal Open Market qphgm.cnmittee meeting. The United States plans to set up a $5 billion fund to invest in mining and increase its supply layout for key minerals. The U.S. House of Representatives will vote on a seven-week appropriations bill on Friday.
Tariffs:
① British media: The EU and Indonesia reach a trade agreement.
②The U.S. Department of qphgm.cnmerce considers imposing tariffs on more imported auto parts.
③ European qphgm.cnmission President von der Leyen and Trump speak Mandarin, the former agrees to gradually phase out Russian oil imports and increase sanctions on Russia.
④Japanese media: Japanese Prime Minister Shigeru Ishiba arranges a visit to the United States next week.
⑤ Trump arrived in the UK.
Whatever the economic forecast, more disagreements may arise within the Fed. Last month’s meeting made history, with the first objection from two Fed directors since 1993 (previous objections were proposed by rotating regional Fed chairmen), and at this meeting we are likely to see at least some of the more dovish directors (Waller, Bowman and Milan) opposing an immediate rate cut of 50 basis points, which laid the groundwork for the Fed’s controversial situation in the fourth quarter.
As for the press conference, I expect Powell to avoid any direct conflict and instead follow the Fed’s dual mission, striving to safeguard his political legacy by achieving an “soft landing” of the economy and keeping inflation as close to the Fed’s 2% goal as possible.
Technically, the US dollar index has fallen below the 10-week low of 97. If the Fed "double rate cuts", the US dollar will be expected to break through the three-and-a-half low of 96.4, set in July. At a larger level, the dollar is still in a long-term downward trend as traders continue to digest the Fed will adopt radical easing policies over the next one or two years, while other central banks are slowing down their rate cuts. As long as this continues, traders may remain keen to sell out any recent rebound in the U.S. dollar, although if the rate cut is less than expected, may rebound above the critical 97.15 level. Only by confirming a breakthrough of the August high of 98.90-99 can the current bearish bias be eliminated.
The market generally expects the Federal Reserve to keep interest rates unchanged, and the market has almost qphgm.cnpletely digested this expectation. But the market expects the Fed to cut interest rates twice by the end of the year, once in October and once in December. Therefore, if the Fed cut interest rates by 25 basis points as scheduled in the early morning, the market attention will turn to the Fed's forward-looking guidance. There are three key points:
The first is the policy statement. If the Fed hinted at preparing to cut interest rates further in the next meeting, it will confirm market expectations and support gold prices; and if the Fed is unwilling to cut interest rates further, it will force the market to weaken dovish expectations and thus suppress gold prices.
The second is the dot matrix diagram. If the median value of the dot graph exceeds the market for the yearThe bottom dovish expectations mean that the Fed may cut interest rates again at its October or December meeting, so the dovish expectations in the market may increase asymmetrically, providing substantial support for gold prices, but this situation seems unlikely. On the other hand, if the dot chart suggests that the Fed intends to cut interest rates only once before the end of the year, we may see gold prices drop.
Last is a press conference by Federal Reserve Chairman Powell. If Powell hints that the Fed is ready to relax monetary policy further, it will be beneficial to gold. However, if Powell expresses hesitation about further monetary easing or the deadline for further easing of policy, it may put pressure on gold prices. Factors to note in the press conference and statements include the possibility that the Fed may overemphasize inflationary pressures in the U.S. economy while downplaying weakness in the U.S. job market. These factors may also put pressure on gold prices and vice versa, as the Fed must balance the weak U.S. job market and relatively stubborn U.S. inflation pressure.
The Federal Reserve is expected to launch a rate cut cycle at its meeting this week. After a 25 basis point cut in September, it cut interest rates by 25 basis points in the next four consecutive meetings, pushing the federal funds rate to reach 3%-3.25% in the first quarter of 2026. This and subsequent meetings will undoubtedly discuss the possibility of a 50 basis point rate cut, and the conditions for triggering a larger rate cut will be an unexpected weakening of inflation or a sign of a recession.
Two non-farm reports released after the July FOMC meeting point to a significant deterioration in the U.S. labor market. The continued implementation of tariff policies also put upward pressure on CPI; although the core service inflation, excluding rent, is on a downward trend, remains at a relatively high level.
At the Jackson Hall meeting after the July non-farm report was released, Federal Reserve Chairman Powell changed his view on risk balance. He pointed out that both the downside risks of labor market and the upside risks of inflation have intensified, which may require policy changes. The subsequent non-farm and CPI data in August—along with a significant downward revision of the benchmark for the year ended March 2025—combined with strengthening the reason for a 25 basis point cut this week.
We believe that although the proposal to cut interest rates by 25 basis points in this meeting will be passed, it will not be passed unanimously, and multiple votes of objection may appear. At least one official (Milan) is expected to support a 50 basis point cut, while at least one other official (Schmid) may object to the policy adjustment. And the median value in the dot matrix graph will be lowered by 50 basis points.
The most critical change since the FOMC meeting in July has been a weakening of the U.S. labor market. Employment growth is now significantly below the breakeven rate after weak July and August employment reports and a sharply negative preliminary benchmark revision, and riskyStill tend to further downgrade. The unemployment rate has risen slightly for two consecutive months. Supporting the labor market has become the Fed's top priority, which is highly likely to drive a 25 basis point cut this week.
In inflation, we still see it as a dual narrative: the growing but moderate tariff effect, superimposed by the potential trend of continuing to fall toward the target. Although core inflation is expected to rise slightly, it is difficult to be a reason for the Fed not to cut interest rates at a time when the labor market has become a more urgent priority.
The key question of this meeting is whether FOMC will suggest that this rate cut will be the beginning of a series of continuous rate cuts. We expect the statement to acknowledge the weak labor market but will not change policy guidelines or suggest a rate cut in October. However, Chairman Powell may send relevant signals moderately at the press conference.
And the economic forecast will be updated in this meeting, and the median dot map is expected to show that the cumulative interest rate cuts to 3.875% in 2025 (although the advantage is weak). While we believe that the Fed leadership currently expects and plans to cut interest rates three times in a row this year, it may also be believed that there is no need to force the median forecast in the dot chart to reflect that there will be three rate cuts this year. It dropped twice in 2026 to 3.375%, once in 2027 to 3.125%, remained unchanged in 2028, and the long-term neutral interest rate remained unchanged by 3%.
FOMC's updated economic forecast in June now looks quite prescient now, and we don't think there is a significant adjustment. The median forecast for 2025 is expected to maintain a GDP growth rate of 1.4%, an unemployment rate of 4.5% and a core PCE inflation of 3.1% are all close to or in line with our own forecasts.
We expect 25 basis points to cut interest rates three consecutive times in September, October and December, and two more next year to 3-3.25%. If the labor market deteriorates faster than expected, subsequent meetings may also cut interest rates by 50 basis points. After probability weighting, our Fed forecast is still slightly dovish than market pricing.
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