Euro-Dollar Surges as Odds of Emergency Federal Reserve Rate Cut Grows

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The Euro to Dollar exchange rate surged in value as markets saw increasing odds of a reactionary 50 basis point cut at the Federal Reserve in September.

In the wake of news the U.S. unemployment rate unexpectedly rose to to 4.3% in July, some analysts even said the Fed could deliver an inter-meeting interest rate cut.

"All this makes a September interest rate seem certain and raises the possibility of both a larger 50 bp cut or even an inter-meeting cut," says Stephen Brown, Deputy Chief North America Economist at Capital Economics.

Euro-Dollar was quoted 1.06% higher day-on-day at 1.0905 in the wake of the employment report that also showed the nonfarm payroll measure of employment rose by 114K in July, down from 179K in June and well below analyst expectations for 176K.

Such a move would smack of desperation and a concession by the Fed that it might just have left it too late with the start of an interest rate cutting cycle.

Rising bets for hefty interest rate cuts are weighing heavily on the U.S. Dollar and stock markets.

Steven Blitz, an economist at TS Lombard, says the Fed has a lot of room to cut; "the topline is that next up is whether a more than 25BP cut is in the offing for September, or even an inter-meeting cut in the funds rate."

The U.S. labour market report follows data a day earlier that showed U.S. manufacturing activity contracted at the fastest pace in eight months in July.

"The rate cut question has quickly shifted from 'when' to ‘by how much’ as investors have upped their bets to more than three 25-bps reductions in 2024. This raises the prospect of a 50-bps cut in December if the Fed stands pat in November due to the clash with the US presidential election. Raffi Boyadjian, Lead Investment Analyst at XM.com.

Nick Timiraos, Chief economics correspondent at The Wall Street Journal, points out that at their June meeting, the unemployment rate in front of Fed officials was 4.0%.

Only 3 of 19 projected an unemployment rate ending Q4 above 4.1% under their base case outlook (which assumed 1-2 cuts this year). None had it above 4.3% in 2025-26.

In short, the labour is materially weaker than policymakers were expecting.

"NFP delivers with near-recessionary data. 50bps is now very likely to be the size of the first cut, which will be delivered at the September FOMC meeting (or earlier?)" says Brent Donnelly at AMFX.

At the July 31 FOMC meeting, Federal Reserve policymakers effectively committed to cutting interest rates in September.

"A reduction in our policy rate could be on the table as soon as the next meeting in September," said Federal Reserve Chair Jerome Powell at Wednesday's policy update.

He cited concerns that the labour market was weakening as a justification for cutting before headline inflation had fallen back to 2.0% on a sustained basis.

The market is signalling the Fed might be a bit late to the party, and some catch-up might now be needed.

This can weigh on the Dollar going forward.

"We reiterate our core view that the US Dollar, as well as both short-term interest rates and long-term bond yields should start to soften more meaningfully across 3Q, once the Fed embarks on its rate cutting cycle in September," says Peter Chia, Senior FX Strategist at UOB.

"Our updated forecasts see stronger upside for EUR/USD and GBP/USD to 1.15 and 1.36 respectively by 2Q25," says Chia.