Dollar on Top After Fed Rate Cut Bets Suffer Another Blow: XM.com
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Written by Raffi Boyadjian, Lead Investment Analyst at XM.com. An original version can be viewed here.
Hopes for an early rate cut by the Federal Reserve were dashed again on Monday following yet another upbeat data release out of the US.
The ISM manufacturing PMI rose more than expected in March, climbing above 50 into expansionary territory for the first time since September 2022.
Moreover, the prices paid sub-index also rose, hitting the highest since July 2022, in a fresh sign that inflationary pressures have not totally dissipated.
The strong PMI reading comes hot on the heels of Friday’s tamed core PCE print and Fed Chair Powell’s somewhat hawkish remarks. Whilst the CPI and PCE data continue to support the notion that inflation remains broadly within a downward trajectory, albeit an increasingly shallow one, other indicators underscore the Fed’s caution on the price outlook.
Subsequently, a rate cut as early as June is starting to look doubtful and the odds of a 25-basis-point reduction in the Fed funds rate have dropped to around 60%. More importantly, investors are now pricing in fewer cuts for the whole of 2024 than what the latest FOMC dot plot projected only a couple of weeks ago.
Treasury yields surged on the back of the data, with the 10-year yield gaining 13.5 basis points. The jump in yields fuelled a fresh rally in the US dollar, which extended its gains to four-and-a-half month highs against a basket of currencies early on Tuesday.
The euro and pound both slid to one-and-a-half month lows against the US currency as a June rate cut remains in play for the ECB while investors are also increasingly confident that the Bank of England will be able begin its easing cycle during the summer, which contrast with the growing uncertainty surrounding the timing for the Fed’s first move.
The yen was still confined within a tight range, hovering around 151.60 to the dollar, as traders were vigilant about a possible intervention by Japanese authorities near the 152 level. Japan’s finance minister repeated on Tuesday that officials “will take appropriate action against excessive volatility”, prompting a slight firming in the yen.
The Australian and New Zealand dollars, however, were steadier today, with the former bouncing back quite strongly, likely due to the improving sentiment about China’s economy following yesterday’s encouraging manufacturing PMI readings.
The next focus for FX markets this week will be the flash CPI numbers out of the Eurozone on Wednesday, followed by the ISM services PMI, culminating with the nonfarm payrolls report on Friday.
It will also be a fairly busy week for Fed talk. Williams, Daly and Mester are due to speak today and Powell will make another appearance tomorrow.
