Will The Fed Buoy The Dollar?

Instead of clinching in some profits on Tuesday, we had to deal with nervous price swings which have led to some losing trades.

U.S. inflation data came in largely in line with expectations but the slight uptick in underlying inflation may lead the Federal Reserve to push back on rate cuts for the next year.

Turning to the December FOMC meeting today, no changes in rates are anticipated, but the Fed could offer a hawkish guidance to avoid further relaxation of financial conditions. Over the past month, interest rate expectations have shifted in a dovish direction, with traders pricing in more than 100 bp of easing through 2024. These expectations appear extreme, given the current economic reality of job growth and still sticky inflation. If the Fed retains a hawkish bias and signals that it will not cut rates as much as the market discounted, Treasury yields could shoot higher as traders unwind dovish bets on the Fed’s forward guidance. And thus, the U.S. dollar would rise.

Today’s comments by Fed Chair Jerome Powell at the press conference which is scheduled for 19:30 GMT, could set the tone for the early weeks of 2024.

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