The U.S. dollar fell on Monday, while both the euro and the pound rose on expectations that the Federal Reserve will begin a cycle of rate cuts later this week.

Is a Big Fed Rate Cut Coming?

The U.S. Federal Reserve completes its latest policy meeting on Wednesday and is expected to begin cutting interest rates from the current 5.25%-5.5% range it has maintained for the past 14 months

A rate cut has been widely indicated by Fed officials as the U.S. consumer price index declined last month to its lowest level since February 2021. However, some uncertainty remains regarding the size of the cut. The U.S. currency fell sharply on Friday after media reports once again fueled speculation that the Fed might make a substantial interest rate cut of nearly 50 basis points.

According to CME FedWatch, Fed funds futures indicate a 59% chance of a 50 basis point cut during the September meeting.

U.S. Treasury yields retreated again on Monday in anticipation of a cut, with benchmark 10-year yields down 30 basis points over the past two weeks.

The Fed’s rate decision will be followed by a post-meeting press conference, where Fed Chairman Jerome Powell could provide signals on future rate estimates and the U.S. economy.

Both the Euro and the Pound Rise

In Europe, EUR/USD rose 0.4% to 1.115, with the single currency in demand despite the European Central Bank cutting interest rates by 25 basis points for the second time in the previous week.

European Central Bank President Christine Lagarde downplayed the likelihood of a further cut in funding costs next week, stating that the rate path was not predetermined and that the ECB would decide rates on a meeting-by-meeting basis, without making prior commitments.

ECB Chief Economist Philip Lane and Vice President Luis de Guindos will speak at separate events on Monday.

GBP/USD rose 0.4% to 1.3173 ahead of the latest ECB policy meeting scheduled for Thursday.

The U.K. central bank is expected to keep its policy rate at 5% after initiating its easing cycle with a 25 basis point reduction in the August meeting.

Yen Rises Ahead of Bank of Japan Meeting

The yen rose 0.8% against the dollar to 139.76, hitting more than eight-month highs, ahead of this week’s Bank of Japan meeting.

The BOJ’s interest rate decision on Friday is expected to maintain its short-term target at 0.25%.

However, BOJ board members have signaled their desire to raise rates, possibly leading to the unwinding of more yen-funded carry trades.

USD/CNY traded flat at 7.0930, with regional trading volume moderated by public holidays in China, Japan, and South Korea.