- The dollar continues to fall awaiting tomorrow’s Fed minutes
- Japanese Yen Rebounds Amid Growing Foreign Rate Cut Bets
- Oil prices recover on possible supply cuts, gold stabilizes
The dollar feels the sadness
There has been a paradigm shift in global markets this month, after a series of disappointing data releases from major economies wiped out any surviving bets on further rate hikes and instead fueled speculation over a series of cuts. rates next year.
Market prices currently suggest that the United States and Europe will launch a coordinated easing cycle in the spring or early summer of 2024, as their central banks shift from fighting inflation to safeguarding economic growth. This price revision has helped lower bond yields, which has been a boon for assets like gold and stocks that benefit from lower rates.
On the currency front, falling yields have translated into a weaker US dollar. This is partly because the Federal Reserve has more room to cut interest rates than most other economies, and partly because optimistic sentiment in riskier assets has dampened safe-haven demand for the currency. world reserve.
All told, the key question for traders is whether current market prices, which predict that the Federal Reserve and the ECB will cut rates almost simultaneously and by equal amounts next year, are realistic, considering that the US economy looks much brighter. healthy than that of the eurozone at this stage. The latest edition of business surveys on Thursday will be crucial in shaping this narrative.
Yen recovers, pound eyes tax cuts
With the dollar losing ground and growing speculation that lower interest rates are on the horizon in most economies, the Japanese yen has come back to life. The Japanese currency is trading higher for the third straight session on Monday, after nearly hitting a three-decade low last week.
It is questionable whether this is the beginning of a trend reversal or just another false dawn, but it appears that the macroeconomic outlook next year favors the yen., in an environment where foreign economies cut rates while the Bank of Japan raises them. With domestic inflation rising and Tokyo preparing a spending package to boost growth, investors expect the Bank of Japan to tighten policy next year, bucking global headwinds.
In the UK, politics is back in the spotlight ahead of Wednesday’s Autumn Statement, in which the government has entertained the idea of cutting income taxes as a means to boost stagnating economic growth. With the Conservatives far behind Labor in opinion polls and an election approaching in 2024, this looks like a last-ditch attempt by Prime Minister Sunak to turn the political tide.
But for the pound, there is a silver lining. Cutting income taxes would help protect the economy from a feared recession and would also add fuel to the inflationary fire, which in turn could force the Bank of England to keep rates elevated for longer. Therefore, any tax cut announcement could prove beneficial for sterling, both from a growth perspective and from the interest rate channel.
Oil recovers and gold consolidates its gains
In the commodities complex, oil prices turned around last week after OPEC+ officials floated the idea of extending their production cuts into next year. The supply cuts were due to expire at the end of this year, but it appears Saudi Arabia is concerned about weak demand in 2024 and is trying to set a floor for oil prices by keeping supply limited.
Gold prices enjoyed a strong rally last week, fueling bets that central banks will cut rates faster and deeper next year. The US dollar’s weakness also helped the dollar-denominated precious metal shine, with gold currently trading less than 5% off its all-time highs.
The next event for gold traders will be the minutes of the latest Federal Reserve meeting, which will be published tomorrow.