• We expect the FOMC to deliver a dovish cut. USD vulnerable to more downside.

• BOC poised to resume easing. CAD to underperform.

• BOJ and BOE widely expected to keep rates on hold. Norges Bank is a toss-up but we lean towards no change. NOK to outperform.

Will the Fed Go Full Dove?

USD traded in a choppy range last week near recent lows, weighed down by the ECB’s signal that it was done easing and US stagflation concerns. In our view, a dovish Fed policy stance can drag USD lower and support risk assets.

We expect the FOMC to deliver a dovish cut because the US labor market is worsening. The private-sector added just 29k jobs on average in June, July, and August, well below the breakeven number for keeping the unemployment rate steady (between 80k and 100k).

On Wednesday, the FOMC is widely expected to trim the target range for the Fed funds rate by 25bps to 4.00-4.25% after keeping them on hold since January. The market price-in just 5% odds of a 50bps cut. The FOMC voting split, dot plots, updated economic projections and Fed Chair Jay Powell’s press conference will shape the extent of the Fed’s dovish tilt.

FOMC vote split will likely show at least one dissent in favor of a 50bps cut and no dissent for keeping rates unchanged. The leading candidates to favor a jumbo cut are: Stephen Miran (assuming he is confirmed by the Senate on Monday), Christopher Waller, and Michelle Bowman.

FOMC Dot Plots to imply more cuts are in the pipeline. In June, the FOMC median rate forecast for 2025 was 3.875% (2 cuts), 2026 was 3.625% (1 cut), 2027 was 3.375% (1 cut), and the longer run was 3.00%. In our view, the new forecast will reflect a slightly steeper cutting path to guard against a sharper downturn in the labor market. We see 2025 at 3.625% (3 cuts), 2026 at 3.125% (2 cuts), 2027 at 2.875% (1 cut), 2028 and longer run at 2.875%. Of note, interest rate futures are pricing the funds rate to reach a low of nearly 2.90% over the next two years.

The new economic projection should reflect rising downside risks to employment. The FOMC median projection for the unemployment rate could be tweaked a tick higher across the forecast horizon.

Powell to echo his dovish message from the August 22 Jackson Hole Economic Policy Symposium. Powell noted that “In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside…Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” The comments suggest that the Fed will prioritize maximum employment over price stability within its dual mandate.

US August retail sales data is due on Tuesday. Consensus sees headline at 0.2% m/m vs. 0.5% in July. The retail sales control group used for GDP calculations, is projected at 0.3% m/m vs. 0.5% in July. On Thursday, weekly jobless claims will be noteworthy because the figure will be for the BLS survey week containing the 12th of the month. Worrisomely, new applications for weekly jobless claims unexpectedly jumped to 263k for the week ended September 6 vs. 236k the previous week, the highest since October 2021. Consensus expect claims to drop to 240k for the week ended September 13.

BOC Back on the Rate Cut Track

The Bank of Canada (BOC) is primed to cut the policy rate 25bps to 2.25% on Wednesday. The swaps market price-in nearly 90% odds of a cut this week and over 80% probability of another 25bps cut by year-end to a terminal level of 2.25%. Canada’s rapidly deteriorating labor market backdrop (the economy lost -65.5k jobs in August and -40.8k in July) leaves room for the BOC to resume easing after being on hold since April. That can further undermine CAD. No Monetary Policy Report is tied to this meeting. The next one is due in October.

Canada’s August CPI print (Tuesday) is unlikely to derail the BOC’s easing path. The minutes from the BOC July 30 meeting highlighted that some members argued that “further monetary policy support would likely be needed…particularly if the labour market softened further [and] If incoming data showed that the upside risks to underlying inflation were not materializing.” In August, headline CPI is expected to rise to 2.0% y/y vs. 1.7% in July due to base effect while core CPI (average of trim and median CPI) is seen unchanged at 3.05% y/y vs. 3.05% in July.

BOE Policy Call a Sideshow

On Thursday, the Bank of England (BOE) is widely expected to keep the policy rate on hold at 4.00% and reiterate its guidance for “a gradual and careful approach” to further rate cuts. We see a vote split of 7-2 in favor of steady rates, with the dissenters supporting a 25bps cut (Taylor and Dhingra). No Monetary Policy Report is tied to this meeting. The next one is due in November.

The BOE will also announce the pace at which it will shrink its bond holdings over the next 12 months. Market participants estimate the new gilt runoff pace to slow from currently £100bn (between October 2024-September 2025) to £60bn-£75bn (between October 2025-September 2026).

Ahead of the BOE policy decision, the UK July labor market data (Tuesday) and August CPI print (Wednesday) will likely point to an economy on the brink of stagflation. That remains an ongoing drag for GBP, especially versus EUR. The policy-relevant private sector regular pay is expected at 4.7% y/y in July vs. 4.8% in June and is a key source of underlying inflation given that labor productivity is estimated at 0% in 2025. Indeed, services inflation remains elevated well above the BOE’s 2% target and is forecast at 4.8% y/y in August vs. 5.0% in July.

Norges Bank: Cut or Hold?

The Norges Bank policy decision on Thursday is a toss-up. The swaps market is pricing 60% odds of a 25bps policy rate cut to 4.00%. Our bias is for the Norges Bank to stand pat for a second consecutive meeting which bodes well for NOK. Norway inflation remains sticky well above the Norges Bank’s 2% target and the Norges Bank’s Regional Network contacts expect output growth to stay elevated through 2025 H2.

Importantly, the Norges Bank will publish its updated Monetary Policy Report. We see scope for the Norges bank to revise higher its policy rate path beyond 2025 in line with the swaps curve. The bank’s policy rate path forecast presented in June implied one 25bps cut to 4.00% by year-end and the policy rate to bottom between 3.00%-3.25% by end-2028. In contrast, the 3-year OIS curve price-in a terminal rate between 3.50-3.75%.

BOJ Still in Zen Mode

The Bank of Japan (BOJ) is widely expected to leave the policy rate at 0.50% on Friday. The BOJ will also stick to its guidance of raising rates if the outlook for economic activity and prices will be realized. No Outlook Report is tied to this meeting. The next one is published in October. The swaps market implies over 60% odds of a 25bps rate hike by year-end and a total of nearly 75bps of rate increases to 1.25% over the next three years.

In our view, the BOJ will not raise the policy rate by more than is currently priced-in partly because CPI less food & energy has held below 2% for over a year. Japan’s August CPI figure is due Thursday. Bottom line: the BOJ’s cautious normalization cycle limits JPY upside. We see USD/JPY holding a wide 142.00-150.00 range the next few months.

Australia’s Jobs Data to Steer RBA

Australia’s August jobs print on Wednesday will guide RBA rate expectations. The RBA flagged that the pace of decline in the cash rate will largely be driven by labor market conditions. The economy is projected to add 21k jobs in August vs. 24.5k in July. Stable labor market conditions would be consistent with a gradual RBA easing path and support the uptrend in AUD/USD. RBA cash rate futures imply 50bps of easing over the next twelve months and the policy rate to bottom at 3.10%.