Financial markets have taken the view that the Federal Reserve has left it too late to cut rates and that a US recession is likely, ING’s FX analysts Francesco Pesole and Chris Turner note.

US exceptionalism is finally waning

“We are not as bearish as some but expect the Fed to start easing restrictive conditions with a 50bp rate cut on 18 September, followed by 25bp cuts in November and December. We see the policy rate dropping to 3.50% next summer. This should be broadly bearish for the USD – though November US elections will be pivotal.”

“Our near-term call is that equity markets and volatility settle, allowing EUR/USD to trade over 1.10 as it reconnects with rate spreads. In effect, we are looking for an orderly USD decline.”

“The eurozone economy does not look great, but we are now in a convergence story. ‘US exceptionalism’ is finally waning.”