Dollar stays on the back foot as traders look to Fed for cut clues

Dollar stays on the back foot as traders look to Fed for cut clues. Image by graystudiopro1 on Freepik

Dollar stays on the back foot as traders look to Fed for cut clues

The dollar remained on the back foot versus major rivals on Wednesday, as traders braced for the conclusion of a Federal Reserve policy meeting.

Dollar stays on the back foot as traders look to Fed for cut clues

Dollar stays on the back foot as traders look to Fed for cut clues. Image by graystudiopro1 on Freepik

Reuters: The dollar remained on the back foot versus major rivals on Wednesday, as traders braced for the conclusion of a Federal Reserve policy meeting and clues on when the U.S. central bank will begin cutting interest rates.

U.S. Dollar stays on the back foot

The U.S. currency edged lower to 145.385 yen in early Asian trading, adding to its 0.5% loss from the previous session. It was also down slightly against the euro at $1.0798, after losing about 0.28% on Tuesday. The dollar index – which gauges the dollar against the euro, yen and four other counterparts – was steady at 103.82 following a 0.31% drop overnight.

Fed officials give updated economic and interest rate projections later in the day – following a meeting where analysts and investors expect rates to stay on hold – and investors will focus on how they see the economy holding up. In particular, investors will be watching to see if Fed Chair Jerome Powell pushes back against the prospect of interest rate cuts in the first half of 2024. Recent signs have been for a soft landing, but data overnight showed consumer prices unexpectedly rising in November.

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Traders currently price in a quarter point rate cut in May. “The Fed hasn’t said they are cutting rates, they have said they are data dependent, but the market is already acting like rate cuts are baked in,” said James Kniveton, senior corporate FX dealer at Convera. “If the Fed does push back tonight on those rate cut expectations, the dollar index may have an opportunity move back into the October range of 105-107.” Later this week the European Central Bank, Bank of England, Norges Bank and the Swiss National Bank also decide policy, with Norway considered the only one which could potentially raise rates. There is also a risk the SNB could dial back its support for the franc in FX markets.

The Bank of Japan’s policy meeting comes next week, and the yen has been volatile on speculation the central bank is drawing close to ending negative rate policy. Building hopes that this may occur next Tuesday were dashed after Bloomberg reported this week that BOJ officials see little need to rush to the exit. The antipodean currencies ticked up against the dollar, with the Aussie adding 0.09% to $0.6565, and New Zealand’s currency rose 0.07% to $0.6139. Meanwhile, leading cryptocurrency bitcoin continued to consolidate around $41,350 after pulling back from the highest since April 2022 at $44,729, reached on Friday.

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South African Rand

Reuters: The South African rand recovered slightly against the dollar on Tuesday as local traders fixed their eyes on inflation at home after softer U.S. consumer inflation data. At 1455 GMT, the rand traded at 19.0075 against the dollar, about 0.4% stronger than its previous close. The dollar last traded around 0.06% weaker against a basket of global currencies. The risk-sensitive rand has made a slight recovery after being on the back foot against the dollar on Monday on expectations the U.S. Federal Reserve might not cut interest rates early next year.

Local markets on Wednesday will turn their attention to November inflation figures that could hint at the health of the South African economy, riddled with crumbling rail and port infrastructure and rolling blackouts. Analysts polled by Reuters predict a drop in year-on-year headline inflation to 5.6%, within the South African Reserve Bank’s preferred target range of 3% to 6%. “While no one has a crystal ball, the rand stands to benefit from the anticipated rate-cutting cycle that is due to come into play towards the second and third quarters of 2024,” said Bianca Botes, director and treasury partner at Citadel Global.

Supply-side inflation out of the U.S. softened to 3.1% year-on-year in November, down from 3.2% in October, and in line with expectations. Traders on Wednesday will focus on Fed Chair Jerome Powell’s speech following an interest rate decision. On the Johannesburg Stock Exchange, the blue-chip Top-40 was down about 1.7%. South Africa’s benchmark 2030 government bond was stronger, with the yield down 3.5 basis points at 10.100%.

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British Pound

Reuters: The pound struggled for direction on Tuesday after data showed U.S. inflation slowed slightly in November and that British wage growth cooled in October. Sterling was last up 0.07% at $1.2563, having traded at around that level for most of the day. The euro was last up 0.22% at 85.93 pence. U.S. consumer prices rose 3.1% in the year to the end of November, data showed on Tuesday, down slightly from a 3.2% rate in October. Month-on-month, prices rose 0.1%. Currencies bounced around but ended up broadly where they were before the release, with the data almost completely in line with analyst expectations.

The pound fell slightly in the morning session in Europe after data showed that British earnings excluding bonuses were 7.3% higher than a year earlier in the three months to October, down from 7.8% in September. Economists expected a fall to 7.4%. The Bank of England sets interest rates on Thursday and the data opened up “the risk that some of the three hawks who voted for a hike in November switch to favouring a hold now,” said Chris Turner, global head of markets at lender ING.

Economists and traders think the bank will almost certainly hold interest rates at 5.25%. But they will be listening closely for hints about when borrowing costs might start to fall. The Federal Reserve is due to set interest rates on Wednesday, before the European Central Bank on Thursday. Both institutions are also expected to hold rates steady. Sterling touched a three-month high of $1.2733 per dollar at the end of November as U.S. bond yields fell sharply on hopes the Fed will start cutting rates early next year. The euro fell to a three-month low against the pound on Monday at 85.5 pence.

Market players think the BoE is likely to hold rates a little longer than both the Fed and the ECB, raising the appeal of sterling. Yet Ashley Webb, UK economist at Capital Economics, said Tuesday’s wage data would likely boost bets that the BoE may cut rates “as soon as the middle of next year”. He said the data “leaves our forecast for rate cuts to start late in 2024 looking a bit more challenging”. The dollar index , which tracks the greenback against six peers, was last down 0.14% at 103.92.

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Global Markets

Reuters: Asian shares were mixed on Wednesday, while oil prices slid to six-month lows as traders waited for the year’s final policy decision from the Federal Reserve and clues on whether the central bank will cut rates next year. Brent bottomed at $72.75 a barrel, its lowest level since late June, while U.S. crude slid to $68.14 a barrel on concerns of softening demand and oversupply. The Fed takes centre stage on Wednesday, where it is due to announce its rate decision at the conclusion of its two-day policy meeting. Market expectations are for policymakers to keep rates on hold, unfazed by a reading on U.S. inflation that came in largely in line with consensus.

That leaves focus on Powell’s press conference and the Fed’s dot plot of future policy trajectory. “The December FOMC is poised to be short on action, given the consensus for no rate hike, but may nevertheless be big on drama,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank. “In particular, as a refreshed dot plot accompanied by revisions to the summary of economic projections that offer ample fodder to interpret the propensity for a Fed pivot as well as confidence around a soft landing. “But the growing danger is that the Fed’s inclination may be to calibrate expectations for a pivot.”

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Nonetheless, investors continue to bet that the Fed is all but certain to begin easing monetary policy in 2024, and are pricing in a 75% chance the first cut could come as early as May, according to the CME FedWatch tool. Those expectations kept market sentiment buoyant, lifting U.S. stocks to fresh 2023 highs on Tuesday. MSCI’s broadest index of Asia-Pacific shares outside Japan however failed to extend the rally and edged 0.2% lower, though moves were subdued ahead of the Fed decision, Japan’s Nikkei bounced 0.6%.

In China, blue-chip stocks fell nearly 0.5% while Hong Kong’s Hang Seng index slid 0.8%, as investors continue to look for clues for further policy support from Beijing. U.S. bond yields hovered near their recent lows, with the two-year Treasury yield last at 4.7245%, having earlier in December hit a nearly six-month trough of 4.5400%. The benchmark 10-year yield steadied at 4.2006%, near its lowest in three months. In the currency market, the U.S. dollar was on the defensive and stood at $1.2558 on the British pound.

British wage growth slowed by the most in almost two years, data on Tuesday showed, though pay was likely still rising too fast for the Bank of England to relax its tough stance against cutting interest rates. The greenback meanwhile last bought 145.48 yen. While investors look for signs of rate cuts next year across major central banks, over in Japan, many are betting for the Bank of Japan to shift away from its ultra-loose monetary policy. “We expect the BOJ to stay steady at the December meeting,” said analysts at Maybank in a note. “We still think they will only exit negative interest rate policy and yield curve control in Q2 2024 after a strong spring wage negotiations’ result.” In commodity markets, gold was kept pinned near a three-week low and was last at $1,980.79 an ounce.

Published by the Mercury Team on 13 December 2023

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