Markets are pricing in a near-certain 25bp Fed cut in December, influenced by dovish Fed chatter and signs of a slowing US economy, while the US Dollar (USD) shows mixed reactions, Commerzbank's FX analyst Michael Pfister notes.

Kevin Hassett seen as dovish Fed chair contender

"On Friday, I discussed the correction in interest rate expectations for the December meeting in detail, emphasising that it is important not to focus too much on the movements for this particular meeting, but rather to keep an eye on the bigger picture. It seems as if market participants saw it similarly. In recent days, expectations for the December meeting have changed again, and a further rate cut of 25 basis points is now almost fully priced in."

"This may be partly due to Kevin Hassett emerging as the frontrunner to succeed as Fed chair this week; he is probably one of the more dovish candidates. However, it may also be due to the data, which, while not yet indicating a major slump, does suggest that the US economy is cooling down. It may simply be due to unusual volatility resulting from uncertainty about the next steps. Individual developments should not be overinterpreted."

"However, a correction also seems to be emerging in another direction: After the USD depreciated again this week (with EUR/USD trading above 1.16), the US dollar also moved closer to rate expectations again."