By Investing.com — The dollar has strengthened, while bonds and small-cap stocks have weakened amid expectations the Federal Reserve could deliver a “hawkish cut,” but BTIG flags the risk of a reversal on Fed decision day.
“The chatter for this month’s meeting is a ‘hawkish cut,’” BTIG said in a recent note, referring to expectations for a 25 basis point rate cut but with a less dovish outlook for further reductions.
Ahead of Wednesday’s Fed decision, the market has been “pre-trading” expectations for a hawkish cut, BTIG added, noting a “stronger dollar, weaker bonds, and weak small-cap/value performance over the last couple of weeks.”
This creates potential for a reversal around Wednesday’s meeting, BTIG said, coinciding with a strong seasonal pattern for small-caps that runs through January.
If the Fed’s communication is hawkish, it could lead to a “stronger dollar and further weakness in bonds and small-cap stocks,” according to BTIG.
For the dollar, meanwhile, expectations are building for a consolidation phase post-meeting. Since September, the greenback has seen fluctuations typical of a “buy the rumor, sell the news” scenario as the market prepares for the Fed’s decision, BITG said.
