Morgan Stanley delays Fed cut call to 2027 (more info). Middle East risk drives dollar
At a Glance
The desk interprets Morgan Stanley's recent shift in Fed cut expectations as a significant indicator of the evolving monetary landscape, particularly in light of persistent inflation and geopolitical tensions. Per the full note, Morgan Stanley has delayed its forecast for rate cuts to early 2027, reflecting a hawkish drift within the FOMC and a terminal rate projection of 3.0-3.25%. This adjustment comes as the market prices an 83.6% probability of no Fed rate changes through year-end, a notable increase from the previous week's 75.9%. The desk believes that the euro's recent decoupling from traditional rate differentials, driven by Middle Eastern geopolitical risks, underscores the dollar's current safe-haven appeal, with potential upside for the euro contingent on de-escalation in the region.
Key Takeaways
- 01Morgan Stanley pushes Fed cut forecast to Jan/Mar 2027 (from Sep/Dec 2026).
- 02Terminal rate seen at 3.0-3.25%.
- 03Euro decoupled from rate differentials; dollar safe-haven bid dominates on Middle East risk.
Full Analysis
What the desk is arguing
Morgan Stanley argues that the Fed will not cut rates until early 2027 due to sticky inflation and a hawkish FOMC drift, with a terminal rate of 3.0-3.25%. On FX, the euro is decoupled from rate differentials due to Middle East risk, and the dollar is supported by safe-haven demand.
Where it sits in our coverage
Our consensus sees the Fed on hold through 2026 with cuts starting in 2027. The firm spread remains wide, with some banks calling for cuts as early as late 2025. Morgan Stanley's call is at the more hawkish end of the spectrum.
How other firms see it
Goldman Sachs expects the first cut in Q2 2026, while JPMorgan sees no cuts until 2027. Barclays is more dovish, forecasting a cut in late 2025.
Market Implications
USD likely to remain well-supported in the near term, especially against the euro, given safe-haven flows and rate differentials. EUR/USD could move toward 1.12 on a US-Iran deal but broader Gulf stabilisation would favour the euro. The Fed's extended hold supports US yields at elevated levels.
From the original
Morgan Stanley pushes Fed cut forecast to Jan/March 2027, citing sticky inflation and hawkish FOMC drift. Euro seen decoupled from rate differentials on Middle East risk; dollar safe-haven bid dominates. Terminal rate seen at 3.0-3.25% Justin had the breaking on this yesterday: M
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