The US Federal Reserve is expected to deliver its first interest-rate cut in nine months on Wednesday, a decision that will reverberate across the Gulf’s dollar-pegged economies and financial markets.
Investors see a 25-basis-point move as virtually certain after a summer of weakening US job growth and rising political tension between the Trump administration and the traditionally independent central bank. Markets are also watching how the Fed’s new governor, Stephen Miran, and the contested status of Governor Lisa Cook influence the debate on how far and fast to ease policy.
“Markets are firmly positioned for a rate cut, with futures assigning around a 95 per cent probability to a 25 bps move,” said Javier Rodriguez-Alarcon, Chief Investment Officer at XTBO and former Goldman Sachs executive.
“A 25 bps cut is the base case, likely sparking a brief rally before markets ‘sell the news.’ A 50 bps surprise, by contrast, would heighten concerns over the health of the economy and underlying growth, weighing on markets in the short term. Over the longer horizon, both scenarios point to the same outcome: lower policy rates erode the appeal of cash, prompting rotation out of money market funds and Treasuries into risk assets such as equities and digital assets.”
Rodriguez-Alarcon added that crypto assets stand to benefit. “For crypto, the backdrop is broadly supportive… Bitcoin and Ethereum may prove more resilient than equities to near-term volatility. Ultimately, the Fed’s forward guidance will matter as much as the cut itself.”
UAE set to mirror the Fed
Because the UAE dirham is pegged to the US dollar, the Central Bank of the UAE (CBUAE) typically moves in lockstep with the Fed.
“Today’s policy meeting is expected to garner unprecedented attention as the central bank is expected to embark on a new easing cycle amidst a complex macroeconomic backdrop,” said Vijay Valecha, Chief Investment Officer at Saxo Bank.
“Markets have nearly fully priced a 25-basis-point reduction, with some chatter about the possibility or need of a greater 50-basis-point cut.”
Valecha expects the UAE to respond immediately.
“Given the currency peg between the dirham and the US dollar, the CBUAE typically mirrors the Fed’s policy stance. Thus, we can expect the CBUAE to reduce the Base Rate applicable to the Overnight Deposit Facility by a corresponding magnitude.
“Lower policy rates would, in effect, lower borrowing costs in the UAE. This could support lending activity, credit growth, real estate demand, and business investment in the region.”
He noted that while lower rates can squeeze banks’ net interest margins, increased loan activity – particularly in the SME sector – can offset that pressure. “Those who wish to invest in property could benefit from a dip in mortgage rates. Even property developers can secure funding at more favourable rates, which could help expedite project launches.”
A weaker dollar also carries trade-offs. “Dovish expectations have brought the U.S. dollar under a fresh wave of pressure,” Valecha said.
“A softer dollar has an indirectly advantageous impact on the UAE’s tourism sector, as it makes travel cheaper for visitors from non-dollar regions. On the flip side, UAE businesses dependent on imports could experience some pressure on their margins, as a softer dollar tends to elevate import costs.”
Broader gulf and Jordan impact
The Fed’s decision will ripple across the wider Middle East, where several currencies are tied to the dollar.
“A potential US Federal Reserve rate cut now seen as highly probable could mark a turning point for the Gulf and Jordan, where monetary policy is closely tied to the dollar through currency pegs,” said Hamza Dweik, Head of Trading MENA at Saxo Bank.
“Unlike in other regions, central banks here rarely have the luxury of diverging from the Fed, meaning the decision in Washington will directly filter through to borrowing costs across the Middle East.”
Dweik said cheaper money could give a timely boost to sectors already showing resilience.
“Real estate and infrastructure projects may accelerate, while falling mortgage rates could reignite demand in both residential and commercial property markets. Households would also feel the difference, with lower loan servicing costs freeing up income for spending on everything from cars to luxury goods,” he said.
“In Jordan, the impact could be even more pronounced, offering meaningful relief to debt-burdened families and lifting consumer confidence.”
Banks will need to adjust. “The banking sector will have to navigate slimmer interest margins, but this may be offset by higher credit uptake and better asset quality,” he added. “Investors, meanwhile, may shift away from fixed-income products in search of higher returns in equities, property, or alternative assets.”
The Fed’s rate call comes amid extraordinary political pressure. President Donald Trump has repeatedly criticised Chair Jerome Powell, sought to fire Governor Lisa Cook, and successfully accelerated the confirmation of Miran to the Board of Governors. Analysts have said the outcome of the two-day meeting will test the central bank’s independence even as it responds to mounting evidence of a cooling US labour market.
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