Right before the decision was announced, the probability of a 50-basis-point move was only just over 60%, as implied by the futures market. To put it another way, almost half of the market participants were surprised by yesterday's decision of the Fed's Open Market Committee (FOMC), Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

The market shifts its interest rate expectations downwards

“Now, I have been repeating like a mantra for as long as anyone can remember that 25 basis points more or less USD carry is irrelevant for USD exchange rates. The only thing relevant about yesterday's decision is what it says about the Fed's medium- to long-term course.”

“The market could shift its interest rate expectations downwards by less than yesterday's surprise, i.e. price in fewer interest rate cuts in the future, because yesterday's interest rate cut was already significant, so not much more is needed in the future. In fact, the market reacted just like that.”

“Even though Powell would never admit it, I still suspect that the Fed acts asymmetrically: that it hesitates for a long time before raising interest rates (like in 2021/22), but acts quickly when it comes to lowering interest rates (like yesterday).”