Fed minutes halt dollar’s drop

Dollar takes a breather after Fed minutes

The wounded dollar showed signs of stabilizing against most of its major peers, after the minutes from the latest FOMC decision suggested that policymakers were willing to maintain a restrictive policy for some time, but also that interest rates would only be raised if new data showed insufficient progress on reducing price pressures.

The minutes kept the door open for another hike should inflation prove to be stickier than expected and confirmed the Fed’s ‘higher for longer’ mentality, which may have helped the dollar to pause its latest steep slide, but they didn’t convince investors to lift their implied rate path. Perhaps the message was considered outdated, as the meeting took place before the disappointing jobs and inflation data that prompted investors to ditch any remaining bets regarding another rate hike and pencil in around 90bps worth of rate reductions for 2024.

Traders’ recent behavior suggests that they pay more attention to the data instead of Fed rhetoric. Therefore, for the dollar to stage a decent comeback, they may need to see numbers pointing to a resilient economy or stickier inflation. Even if rate hike bets do not resurface, they could scale back a decent amount of basis points worth of cuts for next year. The opposite may be true if US economic releases continue to disappoint.

Pound gains on Bailey’s remarks, Jeremy Hunt awaited

The pound was among the currencies that continued to outperform the dollar yesterday as, at a hearing before the Treasury Select Committee, BoE Governor Bailey reiterated the view that they are not changing stance on interest rates and that it is “far too early to be thinking about rate cuts.” Nonetheless, although Governor Bailey clearly added that the risks to UK inflation remain to the upside, the market continued to anticipate no more hikes and around 65bps worth of rate reductions for 2024.

Attention for pound traders now turns to the Autumn Budget Statement where Finance Minister Jeremy Hunt will present the government’s fiscal agenda aimed at boosting a wounded economy. Although any bold announcements could be saved for next year’s Spring Budget, closer to elections, any tax-cut hints today may benefit the pound as it could prompt investors to eventually start considering the likelihood of higher rates by the Bank of England.

Wall Street pulls back on profit taking, gold rally stretches

Wall Street pulled back on Tuesday, with the Nasdaq losing the most. Following the latest very sharp rally in equities, a Fed-minutes day may have been a good opportunity for some profit taking. However, bearing in mind that investors remain convinced that the Fed will cut rates sharply next year, and that Treasury yields are still on a downward sloping path, another round of gains in stocks cannot be ruled out.

After the closing bell, Nvidia’s earnings beat Wall Street expectations. However, the tech-giants shares traded lower in after-hours trading as the company announced that it expects a steep drop in sales to China in Q4 due to new US regulation on AI chips.

The pause in the dollar’s slide and the pullback in stocks were unable to stop gold from extending its recovery and poking its nose above the round number of $2,000. It seems that with investors remaining convinced that the Fed will not raise rates further and that a policy pivot could come as soon as May, the precious metal remains very attractive, despite the Middle East premium abating noticeably.