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According to Francesco Pesole, FX strategist at ING, only a few market participants are still betting on a 50bp cut (16% implied probability), as the recent constructive data flow has helped to cement expectations of a quarter point reduction, which is also ING’s call and they find it hard to believe that the Fed will surprise in this regard.

Key Quotes

“All eyes will therefore be on the language that the FOMC uses to support its decision to ease monetary policy. Our economists believe that Chair Jerome Powell will highlight the downside risks stemming from trade tensions and slowing global growth, including the risk of softer inflation, which supports the need for an insurance cut. While we see room for another quarter point rate cut by the end of this year, market pricing has been much more aggressive on the dovish side.”

“Currently, the OIS curve is showing 63bp of easing (“two-and-a-half cuts”) by year-end, with two more cuts priced in for 2020. As shown in the chart below, this is more aggressive than the most dovish dots in the June FOMC projections. It suggests that, rather than an insurance move, markets are pricing a full-fledged easing cycle by the Fed.”