Market Sentiment Shifts as Inflation Data Eases Rate Cut Concerns
The US dollar held steady on Monday, following the release of moderate inflation data that alleviated concerns about the pace of rate cuts next year. The news brought some relief to investors, who had been on edge since the Federal Reserve’s surprise announcement last week.
Averting a Government Shutdown Boosts Investor Confidence
Congress’ passage of spending legislation on Saturday helped to avoid a government shutdown, lifting investor sentiment and providing a much-needed boost to the market. However, trading volumes are expected to dwindle as the year-end approaches.
Inflation Data: A Mixed Bag
Friday’s inflation data showed a moderate monthly rise in prices, with underlying inflation posting its smallest gain in six months. While this eased concerns about the Fed’s rate cut plans, the annual increase in core inflation remained above the central bank’s 2% target. According to Vasu Menon, managing director of investment strategy at OCBC, the Fed’s shift has brought back the inflation specter, which is likely to keep investors on edge.
Rate Cut Expectations
Traders are currently pricing in 38 basis points of rate cuts next year, shy of the two 25 bp rate cuts the Fed projected last week. The market has pushed the first easing of 2025 out to June, with a cut in March priced at around 53%.
Dollar Index Steady
The dollar index, which measures the US currency against six of its largest peers, remained steady at 107.78 on Monday, near a two-year high of 108.54 touched on Friday. The euro languished at $1.0434, near a two-year low it touched in November, and is down 5.5% this year.
Yen Under Pressure
The dollar’s rise, coupled with the Bank of Japan’s decision to stand pat last week, has left the yen rooted near weak levels that could prompt authorities to intervene. The yen was easier at 156.65 per dollar, near a five-month low it touched on Friday. Analysts expect more verbal warnings from authorities in Tokyo through the end of the year.
Currency Market Volatility
In other currencies, sterling was slightly ahead at $1.2582, while the Australian and New Zealand dollars were on steadier footing after touching two-year lows last week. The Aussie last fetched $0.6258, while the kiwi was at $0.5657. In cryptocurrencies, bitcoin was slightly lower at $94,215.
Thin Liquidity Raises Concerns
As the year-end approaches, thin liquidity raises concerns about rapid market moves that could push the yen to levels that have led to intervention in the past. According to Kyle Rodda, senior financial market analyst at Capital.com, the US inflation data from Friday will help Japanese authorities, as fundamentally the yen’s depreciation is about upside risks to inflation and rates in the United States.
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