What is the market pricing for the Fed ahead of the US CPI report later?

We went from pricing a soft landing to a crash landing and then back to something in between that now. Traders were pretty sure the Fed needed to cut by 50 bps and perhaps even via an emergency meeting on Monday last week. Yes, that was just a little over a week ago. Talk about being overdramatic, eh?

Anyway, the fears and jitters from the carry trade implosion is slowly abating now. But traders are still considering a possibility for the Fed to cut by 50 bps in September. Will that be reaffirmed by the inflation numbers today?

The odds of a rate cut next month is fully priced in, but a 50 bps cut currently has a ~52% probability. The balance is siding with a 25 bps cut. As such, it’s pretty much a coin flip at this stage on how much will the Fed cut rates by in September.

As for the remainder of the year, there’s ~107 bps of rate cuts priced in and that means at least one of the next three meetings should be a 50 bps move. Or at least that is what market players are pricing in right now.

So far, the Fed is looking to tee up a rate cut next month. However, they’re not overstepping in opening the discussion for a need to cut rates by 50 bps. That begs the question, are market players getting too ahead of themselves?

I reckon we’ll only get a better sense next week once Powell makes his appearance in Jackson Hole. After that, there’s about two weeks before the FOMC blackout period starting on 7 September. So, they still have plenty of time to navigate through the narrative.

This article was written by Justin Low at www.forexlive.com.