The US economy is currently facing the possibility of a soft, medium, or hard landing. Despite the weakening labor market, economists believe that a recession can still be avoided, although the risks have increased. If a hard landing does occur, the Federal Reserve may need to cut interest rates by 50 basis points in September. This analysis comes from Commerzbank’s FX analyst Antje Praefcke.
For now, it appears that the US economy is experiencing a medium landing, with some stronger effects but overall still manageable. The economy has cooled down but remains relatively resilient, with the labor market continuing to show strength. Inflation is also approaching the target rate. The market is considering the possibility of a rate cut of more than 25 basis points in September, but is not fully committing to 50 basis points just yet.
The market is anticipating a total of around 100 basis points in rate cuts by the end of the year, with three Federal Open Market Committee (FOMC) meetings still remaining. However, the data has not been poor enough to prompt the Fed to rush into a 50 basis point rate cut in September. The Fed is likely to continue monitoring inflation and the labor market in the coming weeks and months, adjusting rates accordingly if signs of a significant slowdown emerge.
Leading up to the September 18 Fed meeting, the inflation data for August will be a critical factor in shaping market expectations. It is expected that the monthly seasonally adjusted rates of change will align with the inflation target of 2%. Any significant surprises in the inflation data could impact interest rate expectations. The market is likely to focus on the European Central Bank (ECB) meeting as well, with EUR/USD expected to trade sideways in the meantime.
In conclusion, the US economy is facing uncertainties in terms of a potential landing scenario. While a recession can still be avoided, the risks have heightened. The Fed may need to consider a 50 basis point rate cut if a hard landing becomes imminent. The data on inflation and the labor market will play a crucial role in shaping future rate decisions. With market expectations centered around potential rate cuts, both domestic and international economic developments will continue to influence currency pairs like EUR/USD in the coming months.
