Less Dovish, More Reassuring

The Federal Reserve (Fed) started cutting rates yesterday, delivering a widely expected 25bp reduction. The new dot plot shows a median projection of two more 25bp cuts this year and one additional cut in 2026. But the details matter: six members expect no further change, two even pencilled in a rate hike, while nine members see more than just a quarter-point of easing next year, with two of them projecting cuts of up to a full percentage point. In short, the median suggests that Trump won’t get the deep cuts he’s called for — the Fed is not bowing to political pressure.

That’s reassuring. Reassuring because:

• The Fed remains independent and data-driven. It acknowledged slowing job gains (with a 900k downside revision to NFP figures) but also noted that unemployment remains low, while inflation “moved up and remains somewhat elevated.”
• The Fed doesn’t see a major economic downturn. On the contrary, it revised growth and inflation forecasts higher as it announced the first of a series of rate cuts.

Markets weren’t sure how to take the news. The S&P 500 swung before closing just 0.1% lower. The Russell 2000 surged but erased most of its gains, leaving behind a shooting star candlestick. The US 2-year yield rebounded and the dollar index bounced from a fresh yearly low. Today’s session will be key to gauge whether risk appetite holds. Early signs are positive: US and European futures point higher, suggesting that a reasonably dovish Fed, combined with stronger earnings prospects, looser financial conditions and a weaker dollar, keeps risk assets in a sweet spot.

But geopolitical risks are never far. Just as Nvidia looked set to move past China’s regulatory hurdles — having agreed to a 15% licensing fee to secure export approvals — Beijing went a step further: instructing Alibaba and ByteDance to terminate their orders for Nvidia’s chips. That could cost Nvidia between $300m–$1bn in annual revenue. No surprise, the stock dropped more than 2.5%, breaking below its 50-day moving average. A deeper correction could be in the cards unless the narrative shifts.

Asian markets cheered the Fed’s cut. The Nikkei 225 rose 1.3% to a fresh ATH despite political uncertainties in Tokyo. The CSI 300 hit its highest level since March 2022, while the Hang Seng index briefly touched a four-year high. The Kospi also advanced to a record.

Elsewhere, the Bank of Canada (BoC) followed the Fed with its own 25bp cut, helping the TSX hold near all-time highs. But today’s Bank of England (BoE) decision will be the opposite story: rates are expected to stay on hold, with the UK facing slowing growth, sticky inflation and political/budget worries. Sterling is already under pressure against both the dollar and the euro. The BoE’s hawkish divergence, however, doesn’t appeal to traders: the BoE’s cautious tone isn’t backed by growth momentum. With the US dollar poised for a rebound as crowded shorts likely to be unwound, yesterday’s peak in Cable could mark the start of a move toward 1.31–1.33 over the next six weeks. Against the euro, sterling is also set to weaken. As for the EURUSD, the 1.20 handle — if reached — may act as solid resistance. The Fed’s stance reassures dollar bulls that policy isn’t politically captured, opening space for a medium-term dollar recovery cycle, even if the longer-term outlook remains bearish amid trade tensions, geopolitics and US debt concerns.

As such, gold is offered near ATH and silver is down for a third straight session. Both risk further short-term correction if the dollar strengthens. Crude oil remains capped near $65/bbl, with dollar strength limiting upside. A sustained break out of the $62–65/bbl range doesn’t look likely this week.