Santa Claus rally

This week marks the final update on inflation with the release of the personal consumption expenditures report, a key gauge monitored by the Fed. Other data include consumer confidence, initial jobless claims, durable goods orders, and reports on new and existing home sales. As the year ends, markets reflect Powell’s suggestion that the historic tightening of monetary policy is likely behind us, with rate cut discussions looming. However, markets might be overestimating the rate cut pace for the next year. Positive open for equity futures seem to suggest that.

Yields insights

The Federal Open Market Committee (FOMC) unanimously voted to maintain interest rates within the 5.25–5.5% target range, aligning with market forecasts. The Fed’s updated projections anticipate a median of 75 basis points in rate cuts for2024, surpassing earlier expectations of a 50-basis-point reduction. Historically, it has proven beneficial to heed the Fed’s guidance. Market might have moved too swiftly in anticipating rate cuts. This led to a sharp decline in Treasury yields. The rate-sensitive 2-year Treasury yield is 4.4% and the benchmark 10-year yield is 3.9% are to watch out for this week.

Dollar fights back

Dollar rebounded following Federal Reserve Bank of New York President John Williams’ remarks that downplayed rate cut expectations. This despite the Fed projecting 75 basis points in cuts for 2024. The Dollar index had its worst weekly performance in a month due to the dollar’s broader decline this week. Dollar movement this week mostly centered on position rebalancing rather than interpreting Powell’s statements. Investors were pricing in aggressive rate cuts. Williams emphasized the premature nature of rate cut speculations and emphasized the bank’s data-dependent approach.

GBP/USD

In the UK, higher-than-targeted inflation raises uncertainty about rate adjustments by the Bank of England (BoE). Sterling’s recent strength against the euro follows expectations of a delay in rate cuts compared to the European Central Bank (ECB). Sterling’s recent strength against the dollar follows expectations of three rate cuts by the Fed in 2024. However, the mixed PMI reports in the UK reveal manufacturing contraction but a stronger services sector. This week GBP/USD opened mildly stronger to 1.2690.

EUR/USD

Eurozone and German Services PMIs, signaling ongoing economic struggles, weakened the euro. Despite the ECB’s decision to maintain rates, President Christine Lagarde remained cautious, underscoring persistent inflation concerns and dismissing rate cut speculations. Consequently EUR/USD has opened positive this week to 1.0920

USD/JPY

The Bank of Japan’s potential policy shift away from rock-bottom interest rates has garnered attention, driving the yen’s recent strength against the dollar. Speculation arose this week regarding the bank’s potential shift from negative interest rates. The yen’s recent resurgence against the dollar indicates renewed strength with the pair trading around 142.44. However, a hawkish signal from the BoJ has the potential to push the USD/JPY to the 138 level.

Precious metals rally

Weaker dollar and growing expectations for rate cuts in 2024 fueled a rally in precious metals last week. Lower interest rates increase the appeal of holding zero-yield bullion. Real U.S. 10-year yields are now at their highest in eight years, but this has been no barrier to gold vaulting above $2,000 an ounce. Investors are banking on a flurry of rate cuts next year, while political and economic uncertainties are on the rise due to the Israel-Hamas conflict. This could potentially herald a sweet spot for gold investors. This week spot gold opened mildly positive at $2034. While silver opened firm at about $24.13.

Support for oil

Oil climbs on drop in Russia exports, Red Sea jitters. Oil prices rose in Asian trade on Monday, rising nearly 1% in early trade, supported by lower exports from Russia and as attacks by the Houthis on ships in the Red Sea raised concerns of oil supply disruption. The U.S. WTI crude was at $71.77 a barrel, up 0.5%. The bad weather in Russia too has played a part in the stronger open this morning. Russia said on Sunday it would deepen oil export cuts in December by potentially 50,000 barrels per day or more, earlier than promised, as the world’s biggest exporters try to support global oil prices.

Oil decline arrested

Both Brent and WTI ended their longest streak of weekly declines in half a decade with a small gain last week after a U.S. Federal Reserve meeting last week raised hopes that interest rate hikes are over and cuts are on their way. Last week’s dovish Fed meeting paved way for hopes of soft landing for the U.S. economy and for crude oil demand going forward. This week is expected to be positive for oil.

Overall, divergent market sentiments, differing central bank actions, and economic data points are influencing currency and equity and commodity market dynamics, creating uncertainty and shaping market directions.

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