Fed’s Dovish Stance and Market Expectations
Athanasios Vamvakidis, the global head of G10 FX strategy at BofA Global Research, commented on the Fed’s dovish approach, stating that the market was expecting three rate cuts in the 2024 projections. However, Powell reinforced this stance with a very dovish tone, leading to a decrease in the US dollar index. As a result, markets are now pricing in a 90% chance of a rate cut in March, compared to approximately 65% a week earlier. Traders are even pricing in a 20% chance of a rate cut in the next month.
Central Banks’ Mixed Outlook in Europe
The ECB, as anticipated, kept interest rates at a record high and gave no indication of impending policy easing, despite market expectations of rate cuts in the near future. The euro, already strengthened against the weak dollar, maintained its gains after the announcement. The Swiss National Bank also held rates steady, while the Norges Bank surprisingly raised rates by 25 basis points to 4.5%. Meanwhile, the BoE voted 6-3 to leave interest rates unchanged, with some policymakers favoring a rate hike to 5.5%. The committee emphasized the need for high rates for an extended period, contrasting with the dovish Fed.
Yen Strength and Expectations from the Bank of Japan
The Japanese yen continued to strengthen against the US dollar, reaching its highest level since July. Market expectations of the Bank of Japan (BOJ) ending negative interest rates have diminished, although adjustments to the BOJ’s statement, such as a commitment to further easing if necessary, could be seen as a positive step towards normalization. This would contribute to the yen’s strength. On the other hand, the Australian dollar hit a four-month high after a significant increase in domestic net employment, surpassing market forecasts.