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USD: Softer data bolster Fed cut bets – MUFG

MUFG's Senior Currency Analyst Michael Wan explains that weaker US retail sales and signs of cooling labour demand are clouding the Federal Reserve’s policy path. Fed fund futures now fully price a June rate cut and potentially more easing through 2026. Wan argues this could mean US rates markets are still underpricing the scale of Fed cuts implied by Governor Waller’s framework.

US data reinforce easing expectations

"Driving this was a weaker than expected US retail sales print in December, with no growth for the month relative to consensus expectations for a 0.4% mom rise. This comes ahead of the holiday season, and was even before the impact of an extreme cold winter snap in January showed up in the numbers."

"Meanwhile, latest data available for January showed a decline in auto sales and air travel perhaps in part due to weather related disruptions, and this will increasingly cloud the path ahead for the Fed."

"Given the declines in latest job vacancy rates already seen to 3.9% from 4.2% previously, the historical relationship as per the Beveridge curve could suggest a faster pace of increase in unemployment rates from here, even as the absolute levels may remain relatively low."

"This is as per Governor Christopher Waller’s framework, and if right through 2026, could suggest that the US rates market may still be underpricing Fed rate cuts right now."

"We continue to see the Fed cutting rates three times more this year, bringing the Fed funds rate down below 3% with an important caveat being how Kevin Warsh the Fed Chair nominee will conduct policy from here."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

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FXStreet Insights Team

The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

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