Recently, there has been a significant shift in US rate cut expectations. The shift has been so significant, that it has altered the financial market environment. At the start of the year, there were ample signs that the US economy would soften significantly and warrant more rate cuts. However, the US economy is on a much stronger footing now, and the Fed looks like it has successfully engineered a soft landing.
As a result, US interest rates have risen. Some investors may be pricing in Trump’s policy changes, and some might be related to the enormous bond market supply driving higher yields. It is probably a combination of the two, which, when mixed with the strong growth projections for the US means that the US exceptionalism trade is back in vogue and likely to result in an extended period of USD outperformance.
BASELINE VIEW:
Although the Fed cut rates this week, it has tempered expectations for how many more rate cuts are realistic for 2025. Unless the US economy suddenly starts to slow against the current trend of data, the Fed will likely be able to keep interest rates more buoyant for longer. That should support the USD, which ultimately will see the ZAR struggle to stage the kind of appreciation we thought possible around the middle of 2024.
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