As we approach the end of the year, the financial markets are presenting a complex, yet intriguing landscape, particularly in the realm of foreign exchange. Let’s dive into the recent developments and projections that are shaping our strategies and outlook.
The USD/JPY Equation: A Slippery Slope
The USD/JPY pair has been a focal point of interest, especially after its descent from the twin peaks of 151.92/94 witnessed this and last year. It’s imperative to understand that this trend reversal, which was momentarily stalled due to month-end book-squaring of Treasury yields and the dollar, is likely to resume. The undercurrents are not just technical but are also reinforced by U.S. economic data that’s increasingly unfavorable to the dollar. This could potentially lead to rate cuts by the Federal Reserve, aligning with market expectations. The upcoming jobs report next Friday is particularly critical in shaping these expectations.
Powell’s Pivotal Speech and Market Anticipations
All eyes are on Federal Reserve Chair Jerome Powell’s speech scheduled for Friday. This follows Governor Christopher Waller’s hint at possible H1 rate cuts. The markets have historically been ahead of the curve in pricing Fed policy changes, sometimes overly so. But given the latest core PCE data and its downward trend, the market’s expectation of over 100bp of rate cuts next year seems plausible. This forecast aligns with the anticipated impact on the USD/JPY, as disinflation data accumulates.
Employment Data and Its Implications
The December 8 employment report is forecast to maintain the jobless rate at 3.9%, the highest since January 2022. With continued claims trending upwards, we are possibly looking at the highest non-pandemic numbers since 2018. Such data could further support a weaker USD against the yen, especially considering the current Treasury-JGB yield spreads.
Euro and Sterling Movements
The Euro and the Sterling have also shown significant movements. The Euro, despite today’s soft U.S. personal income and spending data, fell 0.7%, influenced by the market’s anticipation of ECB rate cuts, which are expected to be sooner and slightly larger than the Fed’s next year. Sterling also retreated, influenced in part by the broader dollar rebound and a recent upbeat British business survey.
*The Fed’s Stance and Market Repercussions
*Fed officials, including New York Fed President John Williams, have somewhat dampened the dovish excitement. Their reluctance to discuss rate lowering conditions suggests that the dollar might stay resilient for a while. However, Powell’s upcoming comments could significantly impact the market, especially in the lead-up to the December meeting.
