The landing of the US economy can be soft, medium or hard. Despite the weakening of the labor market, our economists continue to think that the US economy can avoid a recession, even if the risks of this have of course increased. An impending hard landing would be the only main reason for the Fed to cut interest rates by 50 basis points in September, Commerzbank’s FX analyst Antje Praefcke notes.
EUR/USD to trade sideways for the time being
“At the moment, it does not look like a soft landing, but a medium one. A few stronger effects here and there, but all in all still bearable for the economy. The economy has cooled down, but is proving relatively resilient, as is the labor market. At the same time, inflation is rapidly approaching the inflation target. This also explains why the market currently considers a rate cut of more than 25 basis points for September to be possible, but does not want to bet fully on 50 basis points.”
“The market is still expecting roughly 100 basis points of rate cuts by the end of the year with three FOMC meetings remaining. But the data was not so bad that the Fed would have to rush ahead and cut rates by 50 basis points in September. Rather, in my view, it can continue to monitor the development of inflation and, above all, the labor market in the coming weeks and months and react accordingly if there are signs of a stronger slowdown on the labor market, which could make a 50-basis point cut necessary from its point of view.”
“Until the Fed meeting on September 18, there is only one important data point left that could shift market expectations: the inflation data for August tomorrow. The monthly seasonally adjusted rates of change in the headline and core rates are likely to be between 0.1% and 0.2% and thus in line the inflation target of 2%. Inflation data would have to surprise significantly tomorrow in order to push interest rate expectations further. Therefore, the market will probably quickly shift its focus to the ECB meeting on Thursday and trade EUR/USD sideways for the time being.”
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