A 50-basis point interest rate cut, if it were to come from the Fed tonight, would be negative for the US Dollar (USD). The Fed's reaction function is more aggressive than previously thought, and not just for today, but possibly for the future, which is USD-negative, Commerzbank’s FX analyst Antje Praefcke notes.

USD gains on a 25 b.p. move are set to be short-lived

“Since the majority has already settled on 50 basis points, a 25 basis point move would probably be the bigger surprise and a disappointment, so the SUD could recover some of its losses in an initial reaction. It will depend on how concerned Fed Chairman Jerome Powell is about the economic situation.”

“If he is clearly concerned that a recession is looming, the market could quickly revert to its expectation of a fairly aggressive rate cut cycle in the coming months, putting the dollar under pressure again. Only if Powell appears confident that the economy will hold up fairly well, the USD is likely to defend its position or even strengthen a little.”