Andreas Steno Larsen, an analyst at Nordea Markets, suggests that they continue to see the best risk/reward in betting on more Fed rate cuts than priced in by the markets because of the strong USD and tight USD liquidity.

• “Tighter USD liquidity and a stronger USD spot level often precedes a global slowdown, and this has also been the case throughout 2019. The reason is that the world relies on cheap USD (in particular the Emerging Markets do).
• Another way to showcase the firm Fed policy is via the percentage of western central banks with a policy rate below that of the Fed. Until very recently that stood at 100% of developed market central banks, but the CNB has now taken the front seat on policy rates.
• It is no wonder that the USD stands firm with almost no other major central banks having a higher policy rate. A weaker USD and an easier Fed policy are probably prerequisites for a turnaround of the current global slowdown and the Fed will probably have to narrow the policy spread versus most of its peers to manufacture that.
• Even though it may be too early to rule out attempts by Christine Lagarde to take the ECB deposit rate deeper into negative territory, markets may very well continue to factor in much bigger easing prospects for the Fed than the ECB in their futures pricing. This should continue to underpin the narrative of lower USD hedge costs.”