Dollar Recovers, But March Fed Cut Probability Remains High: XM.com

Written by Charalampos Pissouros, Senior Investment Analyst at XM.com. An original version of this article can be found here.

The U.S. dollar resumed its recovery against all its major counterparts on Tuesday, although it is trading steady on Wednesday.

That said, this time, the dollar’s recovery is not a reflection of investors scaling back their Fed rate cut bets.

On the contrary, from around 135 yesterday, the total number of basis points worth of expected reductions by the end of the year has risen back up to 140, and the probability for a first quarter-point cut in March was lifted back to nearly 70% from 60%.

Ergo, whether the greenback will be able to maintain its gains and extend its advance will likely depend on tomorrow’s US CPI numbers for December.

Although the core CPI rate is expected to have declined somewhat, the headline figure is anticipated to have accelerated.

Thus, a rebound in headline inflation and a core rate still nearly double the Fed’s objective may eventually prompt investors to scale back their March cut bets. The dollar could gain more as Treasury yields extend their recovery.

Nonetheless, with some other major central banks seen lowering interest rates by fewer basis points than the Fed, calling for a bullish reversal in the US dollar may be premature.

One such example is the RBA, which is expected to cut interest rates by only 45bps this year, even after data earlier today showed a notable slowdown in Australia’s monthly y/y CPI rate in November.

Jumping into the crypto space, bitcoin traded in a volatile manner yesterday following a fake social media post regarding the highly anticipated decision on bitcoin-backed ETFs by the Securities and Exchange Commission (SEC).

The crypto king surged following a tweet by the SEC that it had approved exchange traded funds (ETFs), but soon thereafter the regulator said that someone briefly accessed its X account and posted a fake message about the approval. Bitcoin quickly gave back the gains and lost even more.

The SEC said that they have not yet approved the ETFs, a decision expected to be made later today.

Bitcoin prices have been boosted lately in anticipation of the approval, which suggested that the announcement could result in a sell-the-fact market response.

However, taking into account that the crypto was bought on the fake decision and was sold thereafter to briefly trade below $45,000, another round of gains in case of an official approval cannot be ruled out.

On Wall Street, although both the Dow Jones and the S&P 500 lost some ground yesterday, the Nasdaq secured fractional gains, suggesting there is still enthusiasm surrounding the technology sector.

On Monday, all three indices rallied, with the stock of Nvidia surging to new record highs after the chipmaker announced new AI-related products.

This suggests that the prevailing rally in US stock indices has not priced in all future growth opportunities regarding the AI field but any attempts for new record highs may be delayed if tomorrow’s CPIs reveal stickier-than-expected inflation, as speculation that interest rates could stay high for longer than previously anticipated could hurt present values of firms that are valued by discounting expected free cash flows for the quarters and years ahead.

Speaking about cash flows, the earnings season is kicking off on Friday.

Thus, apart from changes in the market’s implied Fed rate path, valuations will now be impacted by the firms’ new projections as well.

In the energy world, oil prices rebounded after data revealed a larger-than-expected drawdown in US crude inventories and following reports of supply shortages in Libya due to protests at its Sharara oilfield. Renewed attacks on shipping in the Red Sea may have also added support.

That said, it’s hard to call those events game changers. With the US producing at record levels and Saudi Arabia cutting prices amid competition and concerns about supply overhang, any further advances could stay limited and short-lived.