市场资讯及洞察

Introduction to Scaling in Trading Scaling in trading involves adjusting the size of trading positions based on specific criteria or rules. This concept is crucial for both discretionary and automated traders, with the latter group often finding it easier to implement due to the structured, rule-based nature of automated systems. For discretionary traders, scaling introduces flexibility to tailor position sizes to fit current market conditions or account balance.

Scaling strategies can apply to an entire account or to selected strategies, depending on the trader’s goals, approach, and the quality of their data. A well-planned scaling approach can enhance profit potential while managing risk, whereas an ad-hoc or uninformed scaling practice often introduces additional risks without promising substantial rewards. This article outlines critical concepts and principles in developing a robust scaling strategy, helping traders determine a path suited to their trading goals and risk tolerance.

Types of Scaling Approaches The choice of scaling approach is based on factors such as experience, trading objectives, and risk tolerance. Any structured scaling approach generally surpasses none, and selecting one today doesn’t preclude exploring others later. We’ll examine four common approaches to assist you in making an informed decision.

Fixed Lot Size Scaling Fixed Lot Size Scaling involves trading a consistent lot size for each position, regardless of changes in account balance or market conditions. This approach is straightforward and accessible, especially for beginners who might not be ready to adapt position sizes actively. However, fixed lot size scaling can be restrictive; it does not account for changes in account value or market dynamics, limiting the ability to manage risk effectively during volatile market periods.

Example in Automated Trading Fixed lot size scaling is especially useful when transitioning a model from backtesting to live trading. For example, if an Expert Advisor (EA) performed well during backtesting with a fixed lot size of 0.1, starting live trading at this minimum volume is prudent. Doing so allows traders to verify live performance against backtest expectations, ensuring the EA’s effectiveness in real market conditions before considering scaling up.

Fixed Fractional Scaling Fixed Fractional Scaling trades a set percentage of the account balance, automatically adjusting position sizes with account growth or shrinkage. This inherently responsive approach aligns with the account’s performance. For example, a trader may risk 1% of the account per trade in leveraged trading, calculating this amount based on the potential loss if a stop-loss is triggered.

This risk tolerance can vary depending on the individual’s strategy and objectives. Benefits and Considerations This approach helps manage risk, especially as the account size fluctuates. However, the varying lot sizes across different instruments and exposures require close monitoring.

For example, in a portfolio with both Forex and commodity trades, the risks associated with each asset type might differ. Traders must consider this variability to ensure their risk exposure remains consistent. Selective Strategy Scaling Selective Strategy Scaling increases position sizes based on the proven success of specific strategies or components within strategies.

This approach accelerates gains, but reaching a critical mass of trades to evaluate performance becomes more challenging due to its selective nature. Example of Strategy-Specific Scaling Consider a trader using multiple strategies: one focusing on trend-following and another on range-bound markets. If the trend-following strategy demonstrates a high win rate and favourable profit factor over time, the trader may selectively scale this strategy’s position sizes.

Meanwhile, the range-bound strategy could be scaled conservatively until it shows consistent performance. Selective scaling like this allows traders to leverage their most reliable strategies for greater potential returns. Variable Scaling (Advanced) Variable Scaling is a sophisticated approach adjusting trade sizes based on market conditions, including price action, trends, signal strength, and volatility.

Advanced traders using variable scaling develop a system to dynamically adjust position sizes based on indicators, providing flexibility to respond to market changes. Example Using Volatility Suppose a trader monitors market volatility through the Average True Range (ATR) indicator. In periods of low ATR (indicating low volatility), the trader might scale down positions to reduce risk.

Conversely, during high volatility, they might increase position sizes to capitalize on larger price swings. This approach requires a deep understanding of technical analysis and specific criteria for guiding scaling decisions. Broad Principles for Effective Scaling Effective scaling relies on well-defined criteria aligned with account size, risk tolerance, and trading performance.

Key metrics include account balance, margin usage, and trade success metrics. Incremental scaling allows traders to gradually adjust position size, thus managing risk as trading volume increases. A structured scaling plan ensures scaling decisions align with the trader’s goals and risk management rules, avoiding emotional, unplanned adjustments.

Optimal Conditions for Scaling (“The When”) Scaling should be guided by specific performance metrics that assess result reliability. Key indicators include: Win Rate: Consistency in win rate over time is crucial. A stable win rate suggests that the strategy performs well across various market conditions.

Profit Factor: A ratio of gross profit to gross loss. Generally, a profit factor above 1.5 indicates more profitable trades than losses. Drawdown: The peak-to-trough decline in account balance.

Lower drawdown suggests more stability, supporting the case for scaling. When combined with net profit and worked out as a ratio, with automated trading we would expect a Net profit to drawdown ration of at least 8:1 Risk-Reward Ratio: A higher ratio shows that profit potential outweighs losses, making the strategy more viable for scaling. Sharpe Ratio: This risk-adjusted return measure indicates better performance relative to risk.

For instance, if a trader maintains a high win rate, profit factor, and low drawdown, they might consider scaling up. However, if metrics vary significantly, scaling should be approached cautiously. Determining How to Scale The degree to which you scale is a crucial component of your plan.

Scaling is often done incrementally, such as moving from a starting lot size of 0.1 to 0.3, 0.5, and so on, based on the strength of results. For instance, a trader may scale up by 0.1 lot for each 5% account growth, provided performance metrics remain stable. It’s essential to clearly define this scaling plan before implementation, follow it precisely, and review it over time to ensure it meets trading objectives.

Psychology and Challenges of Scaling Scaling involves a psychological shift, as traders manage larger positions with increased potential profit and loss. Traders often encounter procrastination, impatience, or anxiety, especially when adjusting to larger numbers. Managing Psychological Challenges To illustrate this principle in an example, if a trader accustomed to $100 maximum profits scales to a position where potential profits reach $400, the temptation to close trades early may be overwhelming.

To ease this transition, a trader might simulate the larger trades in a “ghost account,” which mirrors live trading without risking real capital. This simulation allows the trader to become comfortable with the numbers, building confidence without financial exposure. Creating and Committing to a Scaling Plan An effective scaling plan is data-driven, with metrics and thresholds to guide scaling actions.

Regular reviews ensure the plan adapts to evolving market conditions and performance outcomes. Like all elements of a trading system, a scaling plan requires discipline, objectivity, and data-driven actions rather than emotional reactions. Summary Scaling is an advanced trading concept that, when applied correctly, can optimize profit potential while managing risk.

This guide outlined various scaling approaches—Fixed Lot Size, Fixed Fractional, Selective Strategy, and Variable Scaling—each with distinct applications depending on the trader’s experience, strategy, and market conditions. Fixed lot size scaling offers simplicity and is suitable for beginners or automated trading, while fixed fractional scaling aligns well with account growth or decline. Selective strategy scaling focuses on increasing successful strategies' position sizes, while variable scaling dynamically adjusts to market conditions, requiring deep technical knowledge.

The guide also emphasized key performance metrics for effective scaling and highlighted the psychological challenges involved, with strategies for managing emotional responses. Ultimately, a successful scaling plan is disciplined, data-driven, and regularly reviewed to ensure alignment with trading objectives. Traders who develop and commit to a structured scaling approach can enhance their trading results by making informed, calculated adjustments to position sizes based on performance metrics and risk tolerance.

Australia's second quarter CPI due out on the 31st of July could go one of two ways so let's dive into how it will move and how to trade it. First way - Coming in line or below Currently 24 of the 30 surveyed economists see inflation coming in line or below expectations. That is June quarter CPI coming in at 1% quarter on quarter and 3.8% year on year.

Trimmed mean expected to come in at 0.9 of 1% quarter on quarter and 4% year on year remembering this is the preferred measure of the RBA. If this is indeed the case it would mean a step down from the March quarter read which was 1% and would hold year on year inflation at 4%. We need to highlight the RBA own forecast as well, because at the last Statement of Monetary Policy update the forecasted head inflation was the same as the consensus 3.8% year on year.

But trimmed mean inflation is 0.2% lower at 3.8% year on year. This will be interesting because the Hawks out there believe anything that is 3.9 or above will be a trigger for the RBA next Tuesday. The variance can be put down to several things how the trimming is actually done but what really matters to us as traders is the impact of dwelling and rents on the inflation figure which has been a key factor for inflation overshooting over the last two years.

If we have a look at rent, expectation is for a 1.9% June quarter rise down from 2.1% in the March quarter. So trending in the right direction but still well above a comfortable and sustainable level. Rent’s overall contribution to the full figure at this point is 0.12 compared to house purchases which is only 0.08 the expectation for the June quarter is 1% the house purchases have 1.9% for utilities.

This gives a combined figure of 1.35% for the June quarter in housing. It is the number one thing to watch on Wednesday. Health is the other part of the inflation data to watch.

We've not got any major updates in the monthly CPI data about health and the expectation is for the June quarter to see a 2.5% increase in health inflation. This is the other part of the data that will matter. We highlight all this to give you as much information as possible to make informed decisions at the 11:30 Australian Eastern Standard Time drop.

Because if the data does come in at these levels it will probably be enough to confirm the RBA will hold at their August 6 meeting. And in line or below figure is likely met with dovish views and bearish trading. More on that below.

Second way: Above expectations What's so interesting about Wednesday's CPI is that for the last 6 consecutive quarterly updates Australia CPI has not just come in above consensus it has been above the full range of views. It's why its giving us reason to pause and to suggest that there is every chance based on the data from the monthly inflation figures the upside surprise is a very real possibility. Retail spending although sluggish has remained above expectations, services have seen reasonable price increases during the April to June.

As things like insurance, telecommunications and utilities increase prices well and truly above the inflation rate. Education already expected to be strong has also seen wage increases during this quarter along with higher infrastructure spending from state governments. Housing which is already forecasted to be strong has surprised to the upside in every one of those six previous readings and according to Core Logic and Prop Track data of the April to June figures suggests that it could be a seventh time in a row housing comes in above expectations.

The final unknown is the energy rebates. It's been so surprising just how long injury baits have been able to hold down electricity prices in the CPI. Several forecasts now show the snapback from these rebates is on.

If this transpires, the expectation is for energy to snap 7.2% higher in the June quarter. Now the caveat here is that already the federal government has put a new $300 per household energy rebate policy in place so maybe this will be ignored. But there's no getting away from the fact energy is the big unknown and one that could blow the CPI data well above expectations.

This is likely to see bullish bets being made on the August 6 RBA meeting and strong positioning in the Aussie dollar. We think at the moment this outcome is being discounted by the market and by the economic world. Because the question that needs to be asked can the RBA justify inflation now running above its own target for three years in a row?

We would argue it probably can't. What trade First and foremost, we need to warn against looking at AUDJPY and AUDUSD. The reason for this, do not forget pretty much at the same time as Australia’s CPI is being released the Bank of Japan is forecasted, for the first time in decades, to release it artificially depressed interest rates.

We know that the BoJ has been defending the JPY over the past month and having seen the AUDJPY get to as high as ¥109.5 in early July the cross now sits at parity. If the BoJ does do as forecasted the cross could do anything on Wednesday. Then there is the unknown about how traders will position with all the machinations the BoJ action and the CPI data means – realistically the cross could experience some mass volatility.

The other is that it is the beginning of the US Federal Reserve’s July meeting and although there is no expectation that they will cut rates on Thursday, it is unknown what would be said during chairperson Powell’s press conference. FX safety trade has been pretty solid over the last period and money has flowed back to the USD. We are unsure about what could happen over the 48 hours between the CPI and when the Fed reports for that reason, we think the USD is probably not the one to look at for this particular piece of data trade.

Thus crosses such as EURAUD, AUDNZD and even AUDCAD are probably better options if you are going to trade pre and post the CPI data as there is no major impact on the other side of the cross from fundamentals in the next 72 hour period. If you are looking to the August 6 RBA meeting you can look at AUDUSD and AUDJPY but with entry points late on Thursday or Friday when there will be a greater understanding about what the Bank of Japan and the US Federal Reserve have done and will do in the future. Happy trading

We now have a post-Jackson Hole set of questions – will the data stick up to what was preached. Reviewing the reactions to Jackson Hole treasury yields declined on a ramp up in bets around the Federal Funds rate after Federal Reserve Chair Jerome Powell's dovish remarks, which were in line with what we forecasted last week. His dovish remarks were enough to shift market expectations for the September Federal Open Market Committee (FOMC) meeting not just towards a potential rate cut, but to a possible heavier cut (50 basis points or more).

Current market pricing for September is above 30 basis points suggesting it is keeping some of its powder dry ahead of the mid-September meeting. But it wasn’t the absolute nail in the hawkish view some were hoping. The current economic environment is making markets highly reactive.

Every piece of data that could indicate whether the U.S. economy is heading for a "hard" or "soft" landing is being scrutinised. That is particularly evident post the softer employment data released in early August, and thus we traders still have plenty of volatility to play with in the coming weeks. Jackson Hole in review Chair Powell's remarks at Jackson Hole signalled the shift in the Fed's focus we all expected.

But it is where the focus has shifted to that matters – the Board’s focus has shifted from inflation to labour market concerns. He emphasised that the Fed does not seek further cooling in labour market conditions and noted that the labour market is looser now than it was in 2019 when inflation was below 2%. While Powell did not specify the size of potential rate cuts, he indicated that the current policy rate gives the Fed ample room to respond to any risks, suggesting that rates are still far from neutral and could return to that level relatively quickly.

The market has taken this change in focus to pencil in the next most important date into its calendar – September 6. This is when the August employment data will be released, and it will be crucial in determining whether the Fed opts for a 25 basis point or a 50 basis point rate cut 10 or so days later. If the unemployment rate remains at 4.3% or rises further, comments suggesting that the labour market is “strong” would appear to be out of touch, and language like this sounds eerily similar to the previous underestimation of inflation being "transitory." So lets drill into what will be the biggest driver of FX and indices ahead of the September meeting - labour The Labour Market the Key to all In the coming weeks, the most critical economic data will revolve around the labour market, as its health will determine whether consumer spending and overall economic activity has remained strong.

The Bureau of Labor Statistics recently estimated that payroll employment as of March 2024 is 818,000 lower than initially thought. Think about that for one second, that is the entire population of the Gold Coast and 80,000 more or to put into Australian numbers its 60,000 jobs less than originally suggested. This has moved the average monthly figure down by 68,000 jobs for the period from April 2023 to March 2024 going from 247,000 a month to 179,000 a month.

The Fed needs to average 200,000 for the economy to be running at neutral. Although these revisions are not finalised until February 2025, the significance is clear - the jobs market is not as strong as previously believed and suggests like we discussed last week that the US could be skidding into a recession based on the Sahms recession indicator. Which is when the three-month moving average of the national unemployment rate is 0.5 percentage point or more above its low over the prior twelve months.

This was triggered in early August and we saw what that led to. What has also caught traders off guard is that historically, revisions to payrolls have been to the upside versus preliminary estimates, mainly due to delays in receiving more complete data from the Quarterly Census of Employment and Wages (QCEW). But when we look at periods of economic stress, take 2009 for example, the final estimates have sometimes shown even larger downward revisions than what we have seen this year.

This trend might be due to the overestimation of factors like the birth-death adjustment and part-time to full-time payrolls, which could be happening again now. If 2024 estimates are indeed overstated, it suggests that July's job growth was more likely to be 114,000 jobs, a figure that may not be confirmed until the next year's benchmark revisions. But a massive USD risk whatever the final figure turns out to be.

We stated last week that despite USD dovish trading over the past few weeks. It’s far from overdone. And we see the labour force data for the rest of the year being key to possible further selling Divergence Between Payroll Growth and Unemployment That brings us to the growing divergence between strong payroll job growth and rising unemployment.

We need to point out here this is not just a US phenomenon, Australia is seeing this situation as well, and it’s to do with the participation rate which is sneaking up. This means more people are falling back into the employment surveys suggesting unemployment might be higher than reported. So despite the robust employment growth figures – unemployment is on the rise faster than growth.

Housing Market Switching to the other great indicator for the Fed and FX traders alike – housing. Existing home sales rose modestly in July, yet new home sales increased at a surprisingly strong pace – however thankfully they remain within recent ranges. Despite a recent decline in mortgage rates (see the 30-year rates as the benchmark here), there has been no significant uptick in new demand, with mortgage applications for purchases remaining low and higher-frequency sales indicators still soft.

Although not on the same level as the labour market for FX movements, signs of overconfidence, increased mortgage applications and existing home sales spikes would get the FOMC’s hawks crowing again. These members have suggested that there hasn’t been sufficient housing stress yet to signal a hard sustained cutting cycle is imminent making housing data the contrarian trade indicator. The conclusion We retain the view that the USD is facing continued head winds, labour data is weakening, the economy is slowing to levels that suggest it could be flirting with recession and inflation is back in sight of the 2% handle.

There is also one other piece of information that allows us to retain our bearish view on the USD… Don’t Fight the Fed! – if they want to cut, they will take the USD with it.

Jackson Hole Symposium – When doves try Market pricing of the Federal Funds rate currently sits at 93 basis point of easing by year-end. Let us put that into perspective it was 110 basis points of easing at the peak of excitement, yet despite the increase in yields DXY has sold off and now trades sub-102.00 and is still falling like a stone. Why?

It's not like EUR/USD data from Europe is smashing USD bulls, European PMIs are expected to be around 50.1, a barely expanding outlook. So it's not that. Second point some are highlighting is the rise and rise of Vice President Harris.

The odds of her taking the Oval Office are mounting by the day. On the day it was announced she will be Democrats presumptive nominee her odds of winning according to Predictit.org was 45c now: She is odds on. Which has put her policies front and centre, including her latest announcement of possible increase to the corporate tax rate to as high as 28 percent.

That might explain DXY’s fall. But really it looks to be down to the only event that has mattered all year – when is the Fed going to cut rates? The off again on again nature of where the Fed sits has been down to the surprise rally in inflation in the March quarter and this has led to Board dissent, mis-matching communication and a general rudderless trading in bonds, FX and like as Powell and Co. faffed about.

That appears like its going to end this week as we turn our attention to Wyoming and the annual Jackson Hole Monetary Policy Symposium. Everything is gearing up to a Jerome Powell speech that will finally set the ship on a clearer path. Why do we think this?

Because history shows that Jackson Hole is normally when Fed Central Banks lay out their playbooks for the coming period. For example: In 2010 as the world and the US struggled to break out of the slump created by the Global Financial Crisis then-Fed Chair Ben Bernanke hinted (practically mapped out) the second series of Quantitative Easing, the bond-buying program designed to stimulate growth and maintain price stability. The markets responded fervently to the money taps being opened further, and the bulls that were long made a killing.

Then in 2020 Now-Fed Chair Jerome Powell announced a major shift in Fed policy framework, introducing average inflation targeting rather than the hard and fast figure of the previous generations. This meant the Fed would now be able to tolerate price fluctuations and periods of time where inflation might hold above the traditional 2% target before raising interest rates. This was in response to COVID and having the ability to flex policy due to the unforeseen nature COVID was creating.

In 2024 – will August 23 be another point for the history books? The doves certainly think so. Expectations are he will map out what the board is willing to tolerate around inflation as recent economic data points are a mixed bag which include: An easing Inflation rate, with July’s consumer price index falling below 3 per cent for the first time since 2021 but at 2.8 percent is still well off target and is falling at a slower pace than forecasted.

Consumer spending remains strong despite the first rate rise in the Federal Funds rate taking place over 20 months ago. July’s retail sales report showed a 1 per cent increase, well above expectations. Then there is the labour market, which was the cause of the recent market volatility due to what is known as Sahm’s recession indicator.

US non farm payrolls in the month of July came in at 4.4 percent - this is low by historical standards but it's the speed of change that triggered the Sahms recession indicator. Since 1950 every time the three-month moving average of the unemployment rate has risen by more than 0.5 percent from the previous 12 month low, The US has entered a recession. That's what is so telling for the market and why the doves are really trying to push The US dollar lower.

Powell is clearly facing a race against time in catching the economy and the unemployment rate before the handbrake in higher interest rates, which has been doing its job, stops working and causes the US to skid and crash. With all this as his “data dependent” input, Powell's remarks will be closely watched for further confirmation of an anticipated interest rate cut that is expected in September. As mentioned above the market has 93 basis points come year end.

With only three more meetings before the end of the year – one of the meetings could have a double notch cut associated with it. Will it be September? That is where Jackson hole comes in for the following reasons: A 25-basis-point cut may not be sufficient to prevent the economy from slipping into a recession, as higher rates make it more challenging for businesses to borrow and grow.

A 50-basis-point cut, on the other hand, risks reigniting inflation and sparking another speculative bull run in the markets, as cheaper borrowing costs could lead to increased risk-taking. Jackson Hole gives Powell the ability to test out the market’s appetite and concern, on this last point. If the response to a 50-basis point cut leads to speculative trading, and inflation fears before the September meeting then it will likely take the softer path.

If however the markets suggest this isn’t enough to ‘stop the skid’ then come December the 93 plus basis point cuts forecasted are on. Which brings us to the final point. Is the USD oversold?

In short – no. Yes, bearish beats are growing but looking at the likes of the EUR/USD, AUD/USD, GBP/USD and USD/CAD none of these are screaming oversold. In fact there is clear room for further runs particularly in the first two.

So set your alarm clocks – Jackson Hole is going to provide the playbook for the rest of the FX year.

In the words of one of the greatest supporting roles of all-time, this being Rafiki from the Lion King – It is time, (finally). We understand this is a bit tongue and cheek but the amount of false starts in 2024, we think it sums up what traders have been experiencing. So, we have reached the other side of the mountain.

The cuts are coming. The question now is by how much and how often. It is this question that we traders now need to address.

First let’s look to Thursday's September Federal Open Market Committee (FOMC) meeting. Current market pricing has the FOMC reducing the target range for the federal funds rate by 43 basis points, which puts the probability of a 50-basis point cut in the range of 65 to 70 per cent. This would bring the Federal Funds rate to 4.75 per cent from 5.00 per cent.

The consensus from the economic community also points to a 50-basis point cut. However, the number of 50-basis point worth of cuts versus 25-basis point worth of cuts sits at 24 to 20 suggesting a more conservative view than the headline figure. Our two cents on this using the recent communications from the Fed and barring more severe economic deterioration, we think the Committee will likely opt for a series of 25 basis point cuts going forward including Thursday’s meeting.

What is not disputed is whatever they do on Thursday it’s likely to be the beginning of a series of rate reductions aimed at recalibrating monetary policy to better align with evolving economic conditions – which as we have discussed over the last few weeks is pretty gloomy. So who is right on Thursday’s meeting and what else can we traders take out of the current FOMC environment. All the Talk – nothing is linear The future trajectory of US monetary policy will depend on several changing factors, labour market dynamics being the biggest one.

Take Federal Reserve Governor Christopher Waller’s recent remarks that emphasised the uncertainty surrounding the pace and total amount of rate cuts. He highlighted that these decisions will be data-driven and measured. While he believes “it is time” to begin cutting rates, the start should be a modest reduction as the data, while suggesting things are poor, are not flashing red.

He also remains cautious about making any definitive projections regarding the pace of future cuts. This is important for us – the market is basically pricing in an almost linear decline in rates through to August next year. Waller thinks it isn’t that clear cut - as he distinguishes between "softening" which it currently is doing in the labour market and a "deterioration” which would be out and out capitulation.

This suggests that aggressive action (such as 50 basis point rate cuts) would only be considered if there is a notable and sustained decline in employment. Now if we take Waller’s comments and marry them with New York Fed President John Williams as a clearer picture of the board’s thinking emerges. Williams uses the term "dial down" to describe the gradual reduction of rates and stressed that policy adjustments should move "to a more neutral setting over time." This is not the language of a Board considering hard and fast action on monetary policy.

Rather one that is looking for a steady, deliberate process. Which brings us to one of the more dovish players on the Board San Francisco Fed President Mary Daly’s – have a look at these words when asked about rate cuts: "regular cadence" in adjustments, this aligns with Waller and Williams remarks and suggest the expectation of a methodical approach rather than abrupt shifts is the better trading view. Now there are some caveats to what we have just presented.

Waller did not entirely rule out the possibility of larger cuts particularly if there was a sharp labour market contraction. The current economic outlook does not suggest such a drastic deterioration in the labour market, but Waller’s flexibility indicates the Fed’s readiness to act decisively if conditions worsen, so again not linear and the hard and fast option may still materialise. The Man himself: A Clear Path Forward This is all well and good but really what does the man himself think?

Gauging his plethora of talks, speeches, firesides and everything else that’s in the public domain Fed Chair Jerome Powell looks to be leaning into the expectation that rate cuts once started will be pretty consistent until it hits target. He has, like the others, emphasised that the path forward remains data dependent. What we think he will say going forward is that while inflation has not yet been fully tamed, the current stance of monetary policy remains restrictive enough to continue exerting downward pressure on inflation.

At the same time, expect him to point out that the Fed has room to lower rates while still working towards its dual mandate of maximum employment and stable prices. Specifically, Powell may highlight the need to prevent further slowing in the labour market, and that recalibrating rates downward is crucial to avoiding an unnecessary shortfall in employment. He is also likely to frame the upcoming rate cuts as a measured approach to bringing inflation back to target while safeguarding the labour market and broader economy.

Crystal balls – How far down the mountain So where does all this leave us? The consensus for the FOMC’s Dot Plot Projections reflect a path of gradual rate cuts. That same consensus is forecasting that the Committee will project rates approaching 3.00 per cent by the end of 2025, reflecting a moderate easing cycle designed to balance the need for inflation control with concerns about growth and employment.

Based on all of the above, expect the median policy outlook to include three 25 basis point rate cuts in 2024, followed by five additional cuts in 2025, and one final cut in 2026 to bring us down the mountain. This would bring the terminal federal funds rate to a range of 3.00 per cent to 3.25 per cent, although don’t be surprised if the forecast ends with the rate slightly lower, in the 2.75 per cent to 3.00per cent range, aligning with the Fed’s longer-term rate expectations. So it is time – tomorrow’s FOMC meeting is likely to mark the beginning of a rate-cutting cycle, with gradual easing expected through 2024 and beyond.

Inflation remains a key focus but it is increasingly shifting its attention to preventing an excessive slowdown in the labour market, signalling a clear path towards further rate cuts while maintaining a balanced approach to managing economic risks.

With core CPI missing expectations and some slight deceleration in other areas such as retail sales an overall service economic activity. The RBA is likely to hold tight and not raise rates on Tuesday. We say this with some confidence, based on the communication coming from RBA governor Bullock.

She had emphasised the importance of the second quarter CPI print at the June meeting, despite providing hawkish rhetoric around the risk of rate rises and a stalling inflation story. This had led the market and many economists to suggest the possibility of a rate rise has now reduced to sub 10% coming into Tuesday's meeting. That clearly means that it's not still a possibility but all things being equal the likelihood now is negligible.

You can see that here in the charts of the Aussie dollar particularly against the JPY and the USD AUDUSD AUDJPY Given the preference for rate stability by the board, what's also interesting about the Q2 CPI figures is that it gives them a clear path to keep rate stability (their words) for the stable future. It suggests not only will August be a hold but suggests that the September meeting as well would likely be the same. However it can't be ignored that CPI was slightly ahead of forecast and thus the Statement of Monetary Policy (SoMP) coming up in a few weeks will be very interesting.

Because we expect forecast changes and are likely to show a slower progress towards target. So first and foremost, forecasts have to narrow to include the higher than expected year on year figure. The forecast for inflation at the May SoMP update didn't include the new Federal government’s $300 energy rebate or the Western Australian and Queensland governments respective energy rebate.

This will significantly lower the financial year 24 inflation rate but will simultaneously raise the financial year 25 forecast by a similar amount. Providing a bit of a catch 22 from the board. There's been upward revisions in consumer spending and are likely to challenge the forecast assumptions used in the May statement of monetary policy that was justifying a lower part of inflation.

All things therefore being considered the hawkish message coming from governor Bullock is likely to persist. Because as this chart shows core inflation and headline inflation in Australia is the highest against all major peers and despite the RBA having a 2 to 3% target band higher than its peers around 2% it is a long long way away from reaching its goal. It should therefore be pointed out that come the Tuesday decision making call “all options” as the RBA like to call it, realistically means a tight hold or a possible rate hike With the right hike being dismissed.

This means that there is a divergence going on between the RBA and the rest of the dovish global environment. You only have to look at what the Bank of England said last week to understand that something like AUDGBP has a neutral central bank with the hawkish bias dovish central bank with dovish action to see the pair likely moving slightly higher in the interim. The same argument could actually be made for the AUDUSD because post the CPI number as we explained last week The US Federal Reserve was due to meet.

And although the board didn't move the Federal Funds rate At the July meeting it is all but confirmed September is the likely start point for the Fed’s right cutting cycle. The US has seen some pretty mixed data over the last six days. Unemployment has ticked up; retail sales ticked down; inflation has moderated and forward looking indicators in consumer confidence and industrial manufacturing have both declined.

Couple this with the US election geopolitical risks and other factors explains the rally that has happened in the pair post the CPI data as seen here: AUDUSD Returning to the outlook for the US and the federal funds rate post the FOMC July meeting. 7 major economists are forecasting not just the September meeting with a rate cut but the remaining three meetings of the year will see cuts from Constitutional Ave. And if we take into consideration the FOMC’s dot plots the cuts will continue early into 2025 most likely at the February, March and May meetings. If this doesn't indeed come to fruition the impact on US indices will clearly be to the upside.

FX is likely to have to ask some serious questions around pricing in pairs such as the EUR, GBP and CAD. Which brings us back to the Aussie dollar The current sell off that we've seen in the currency is based solely on the idea the RBA is on a tight hold, and that selling is probably justified. However with the data that is currently before us it is hard to make a case that isn't bullish for the AUD as it gets left behind in the rate cut environment and dovish outlook the global economy is about to undertake.

Thus post Tuesdays meeting Michele Bullock's press conference will be key to this trade idea because it's likely to show you like she did in June that is going to have to continue on with the hawkish view and jawbone inflation lower.