Bond traders once again believe that Fed policymakers are more likely to cut interest rates by 50 basis points at this week's meeting rather than 25 basis points.

Interest rate swap contracts linked to the Fed's interest rate decision show that the probability of a 50 basis point rate cut by the Fed this week is over 50%, compared to last week when traders almost completely ruled out this possibility. This has led to a two-year US Treasury yield falling to its lowest level in two years and dragging down the US dollar index to its lowest level since January.

The recent market reversal of bets has increased the risk of the Fed's September policy meeting. There are differing opinions among investors on how much policy support the economy needs and what signal the Fed's decision to initiate a substantial rate cut will send.

Due to the Fed members being in a blackout period before the policy meeting, traders only have limited data to rely on, including Tuesday's August retail sales.

"This will be a crucial decision," wrote Philip Marey, Senior US Strategist at Rabobank, who expects the Fed to implement a standard 25 basis point rate cut. "Powell's lack of guidance may indicate that the FOMC has not reached a consensus. More importantly, Tuesday's retail sales could still change market expectations."

All of this is happening against the backdrop of an increasingly tense political situation in the United States. The FBI is investigating an apparent assassination attempt against former President Trump, who just two months ago, the Republican presidential candidate was shot at a rally in Pennsylvania. Currently, the market is ignoring the developments and US stocks opened slightly higher.

On Monday, the two-year US Treasury yield fell 4 basis points to 3.54%, continuing the trend of a sharp drop from its high of over 5% in late April.

However, the blackrock strategist's stance on short-term US bonds has changed from shareholding to persistence, stating that the market's bet on the extent of the Fed rate cut is unlikely to succeed. Due to the relatively high yields of US bonds, the blackrock strategist favors medium-term US bonds with maturities of 5 to 10 years.

The company's Chief Investment Strategist Wei Li stated that the speculation that the Fed waited too long to ease policy and is now forced to accelerate rate cuts to boost the economy is wrong. In an interview, she expressed her expectation that the Fed will cut rates by 25 basis points on Wednesday.

Li said, "We believe the market has slightly overpriced the depth of the rate cut cycle. The rate cut cycle is starting, but the extent may not be as large as the market has priced."

Although Li acknowledges that the risk of a recession may have increased, she stated that her primary forecast is still for a slowdown in the US economy rather than contraction. She mentioned that policymakers remain cautious about "persistent" inflation in certain areas of the economy.

She explained, "What we are seeing is the US creating an average of 0.164 million jobs per month over the past six months, which is still a quite strong pace."

The repricing of market expectations for Fed rate cuts has also impacted the US dollar, which has weakened against most major currencies in the past month. The Japanese yen is one of the currencies with the largest gains, breaking through the key level of 140 on Monday.

Rodrigo Catril, strategist at National Australia Bank Limited sponsored ADR, said, "We believe the upcoming new easing cycle by the Fed is a major impediment for the US dollar. As the Fed eases policies and pushes fund rates towards neutral or even lower levels next year, the US dollar will begin a cyclical decline."

While a technical indicator suggests support for the US dollar, the market overwhelmingly stands in the camp of a weak dollar. Bloomberg's survey of analysts indicates an expectation that by this time next year, the euro, yen, Canadian dollar, and Australian dollar will all strengthen against the US dollar.

Editor/Lambor