When is the Fed cutting rates and what does it mean for USD?

Key points

• The final FOMC meeting of the year will take place at 2pm on December 13th
• Fed Fund Futures are pricing around a 40% chance of a rate cut in March
• the dollar has fallen with lower rate projections

US interest rate projections

As financial market participants speculate about the Federal Reserve's future monetary policy decisions, one of the most significant questions on traders' minds is when the Fed will cut interest rates. Such a shift would mark the transition from the consistent rate hiking environment of the past few years to the first rate-cutting environment since the onset of the pandemic. Understanding how to project interest rate movements is crucial for traders, as it directly impacts not only the bond market but US dollar as well.

Interest rate projections are informed by a myriad of economic indicators, including employment and inflation data. These projections are not merely educated guesses but are formulated using tools like the Fed Funds futures, which reflect the collective sentiment of thousands actively trading in the futures market. For instance, if the Fed Funds futures for March 2024 are priced around $95, this suggests a market expectation of the Fed Funds rate being at 5.00%, a potential decrease from the current range of 5.25% to 5.50%.

The pricing of Fed Funds futures can be understood by subtracting the futures price from 100, which gives the projected Fed Funds rate after the respective month's Federal Open Market Committee (FOMC) meeting. As traders, it's important to monitor these prices as they adjust to new economic data and geopolitical events that might influence the Fed's decisions. For example, strong inflation data or geopolitical tensions can lead to higher rate projections, while economic crises may lead to lower projections.

Traders should also consider the broader implications of interest rate changes on currency markets. When the Fed raises interest rates, the U.S. dollar often strengthens due to increased demand for dollar-denominated assets that now offer higher returns. Conversely, when rate cuts are anticipated, the dollar may weaken as yields on these assets become less attractive.

The USD/JPY currency pair is a prime example of this correlation, where the dollar's value against the yen can fluctuate significantly based on the interest rate differential between the two countries. With Japan maintaining near-zero interest rates, the dollar's strength has been more pronounced, but as rate cut expectations for the U.S. increase, we could see the dollar's relative strength diminish.

How to trade USD

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open and close positions on USD pairs

Trading forex requires an account with a forex provider like IG. Many traders watch major forex pairs like EUR/USD and USD/JPY, which can be found in IG's platform under the 'Major' pairs tab, for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like IG’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understanding key terms. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.