The Dollar and Fed Rate Cut Expectations
BofA Global Research stated on Monday their forecast for four 25-basis point rate cuts by the U.S. Federal Reserve next year, with the first one expected in March. This represents an upward revision from their prior forecast of a total of 75 bps. However, some Fed officials are now attempting to push back on this aggressive dovish repricing.
Chicago Fed President Austan Goolsbee expressed on Monday that the central bank is not making any commitments to cutting interest rates soon and swiftly. He said, “I was confused a bit… was the market just imputing ‘Here’s what we want them to be saying.’ We don’t debate specific policies speculatively about the future.” Goolsbee is scheduled to speak again later on Tuesday, and Atlanta Fed President Raphael Bostic is also set to discuss the U.S. economy at a separate event.
Bank of Japan Policy and Yen Movement
In the meantime, USD/JPY saw a 1.3% increase, trading at 144.59 after the Bank of Japan decided to keep interest rates at negative levels and offered no indications of when it plans to tighten policy.
Although Governor Kazuo Ueda has previously hinted at potential policy tightening in 2024, he reiterated the need for ultra-loose policy in the near-term due to increased economic risks in Japan. However, the yen remains close to its recent five-month highs against the dollar, having made a strong recovery following dovish signals from the Federal Reserve last week.
Analysts at ING commented, “The Bank kept its dovish guidance unchanged (‘take additional monetary easing steps without hesitation if needed’) which forced markets to abandon speculation of a rate hike in January.”
EUR/USD and GBP/USD Movement
EUR/USD rose by 0.2% to 1.0942 after the release of the final reading of eurozone inflation in November, which showed a 0.6% monthly decrease in consumer prices. On an annual basis, inflation increased by 2.4%, down from 2.9% in the previous month.
ECB policymaker Yannis Stournaras, typically known as a dove, joined a growing group of central bank officials who are pushing back against market expectations for a spring rate cut. This development contributed to the euro’s gains against the dollar.
GBP/USD rose by 0.4% to 1.2691. With U.K. inflation data set to be released on Wednesday, it is still projected to be well above the Bank of England’s 2% medium-term target. This makes rate cuts less likely in the near future.
USD/CNY and People’s Bank of China Decision
USD/CNY traded 0.1% higher at 7.1424 ahead of the People’s Bank of China’s decision on loan prime rates later this week.