Market May Overestimate March Rate Cut: Is the USD Primed for Gains?

Key Points:

• Market assigns a 30% chance of a US Federal Reserve rate cut in March, despite Powell’s skepticism.
• Jerome Powell’s remarks suggest that a rate cut in March is unlikely.
• Investors consider whether the USD could benefit from current market expectations.
• Potential long-term implications if the Fed opts for a significant rate cut later in the year.

The market is currently pricing in a 30% chance of a rate cut by the US Federal Reserve in March, but this may be an overestimation. Federal Reserve Chairman Jerome Powell, speaking after the latest FOMC decision, indicated that a rate cut in March is unlikely, challenging current market expectations.

Given Powell’s comments, some analysts question whether the market’s 30% estimate is too high. Shouldn’t the likelihood of a March rate cut be closer to 10% or less? This discrepancy presents a potential opportunity for traders to go long on the US dollar, at least until March.

Looking beyond March, the market is also speculating on the size of a potential rate cut when the Fed eventually decides to ease monetary policy. The Fed has a history of acting somewhat late, which could lead to a larger-than-expected rate cut, such as 50 basis points, rather than the more common 25 basis points. This possibility might create additional opportunities for investors as the Fed seeks to avoid over-constraining the economy.