On the Tokyo foreign exchange market on the 18th, the yen rose to the mid-141 yen range per dollar. Strong expectations for a significant interest rate cut at the same day’s Federal Open Market Committee (FOMC) meeting have led to an increase in yen buying and dollar selling ahead of the announcement. It was also pointed out that there was real demand for yen buying related to the setting of the official rate, which is used as a benchmark for foreign exchange transactions by financial institutions.
Senior foreign exchange strategist Yukio Ishizuki at Daiwa Securities noted that the prevailing view in the market is that the U.S. interest rate cut this time will be 50 basis points (bp, 1 bp = 0.01%). He remarked, “If it remains at 25 bp, disappointment will be very significant, and U.S. monetary authorities may also be forced to move in that direction.”
In the U.S. interest rate swap market, the probability of a 50 bp cut being decided at the FOMC on the 18th remains above 50%. Ishizuki believes that the Federal Reserve (FRB) has sent a message suggesting that a 50 bp cut is possible as a precautionary measure, adding that “this has likely become the main scenario for the market.”
On the other hand, Mari Ueda, head of financial market research at SBI Liquidity Market, remarked that although Fed Chairman Powell leans dovishly, “it is not seen as the consensus of the FOMC, and a 50 bp cut for precautionary reasons is hard to imagine in the first place.”
Attention is also focused on the interest rate forecast distribution chart (dot plot) that indicates future policy rate outlooks at the FOMC, with Ishizuki of Daiwa stating that “even if the cut is 50 bp, the market’s reaction will vary depending on how the dot plot is presented.”