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Jerome Powell, Chairman of the Federal Reserve (Fed), recently announced a 25 basis point cut in interest rates, placing the range at 4.25%-4.5%. This move marks the third consecutive cut since September and seeks to rejuvenate a slowing economy by encouraging investment.
However, the financial markets offered a completely different reaction than expected, plunging investors and analysts into an environment of high volatility and uncertainty.
Market reaction to rate cut
Conventional logic would suggest that this cut would weaken the dollar and bring temporary relief to some risk assets. However, what happened was quite the opposite. The main indices and financial assets showed significant falls:
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- Wall Street in free fall: The S&P 500, normally a barometer of investor sentiment, suffered a sharp pullback, shedding recent gains.
- Bitcoin suffers a severe blow: Considered by some as a haven of value, Bitcoin broke down key support, falling more than 4% and touching the psychological level of $100K. The prevailing uncertainty affected one of the most volatile assets.
- EUR/USD under pressure: The stock attempted a brief initial rally, but quickly lost ground, consolidating below 1.04. For analysts, this reflects renewed strength in the dollar driven by speculation.
Evolution of the EURUSD in the volatile session on Wednesday. Source: Investing.com
Speculation and the paradox: «Buy with the rumor, sell with the news»
One of the key factors behind this contradictory market behavior lies in the speculative dynamic widely known in financial circles as “buy on the rumor, sell on the news.” In the weeks prior to the announcement, investors were betting on a sustained weakening of the dollar, maintaining long positions in assets such as the euro or cryptocurrencies. However, after the confirmation of the rate cuts, they decided to undo positions, intensifying the selling pressure.
Speculative behavior is increasingly common, amplified by the emergence of automated systems and algorithms that exacerbate sharp movements in markets such as Forex and cryptocurrencies.
Future perspectives for Central Banks and the Market
Powell’s message was clear but cautious. He noted that the decision for this latest cut was tighter than previous ones, hinting that the Fed could reduce the pace of cuts in 2025. Although inflation shows signs of slowing, it still remains above the 2% target, a framework that continues to worry central banks.
On the other hand, the political and economic context of the United States adds an additional layer of uncertainty. Donald Trump’s arrival back in the White House raises questions about the direction of economic policies, as Europe faces its own challenges with a possible rate cut by the ECB, which could further reinforce the dollar’s recent strength.
High volatility as the new normal
By 2025, central banks such as the Fed and ECB are anticipated to adopt more conservative approaches to avoid risks associated with prolonged recessions. However, investors will have to adjust to a panorama where volatility will be the protagonist.
Short-term speculative movements are likely to continue, with markets attentive to every statement from major financial authorities.
Conclusion
The Federal Reserve’s recent rate cut has highlighted the complexity of the relationship between monetary policy and financial market responses. While central banks try to maintain a delicate balance between promoting economic growth and controlling inflation, markets react with volatility, driven by emotions and speculation.
In the coming months, investors will need to remain cautious and prepared for a rapidly changing environment. Financial reality rarely responds to simple theories or linear predictions, and the safest strategy will be to pay attention to details, understand speculative dynamics and stay informed about the decisions that will dictate the course of global markets.
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