‘Not so fast.’ That appears to be the prevailing message from central banks so far in 2024 regarding the prospects of interest rate relief. Be it officials from the Fed, the ECB or the RBA, the overriding theme is one of pushing back against market expectations of rate cuts happening early and often in 2024. Throw some solid economic data into the mix such as last week’s bumper US jobs data, and the broader financial market is undergoing are pricing phase regarding the interest rate outlook.
The result? The USD has been the big winner in currency circles so far this year, with the Dollar Index up around 2.6% YTD (Year to Date). The greenback has been underpinned by rising treasury yields with the odds of a March FOMC rate cut having narrowed considerably since the start of the year. Many market participants are still holding hope that a rate cut will be delivered by the Fed in May, though if the jobs market keeps steaming ahead then we might need to wait until the second half of the year to see the commencement of the monetary policy easing phase. As is usual, the data overcoming months will tell the story.
Looking at the more immediate picture, the USD pulled back from 3-month highs as bond yields eased. This can be viewed as a natural pullback from the price gains seen in the wake of the FOMC meeting and NFP data last week. The DXY (Dollar Index) is clinging onto the 104 level (during Asian trading hours Wednesday) though the support level at 103.84 could come into play if further profit taking on the greenback ensues.
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The moderate pullback in the USD and bond yields has left the door open for gold to reclaim ground to the upside. The spot price has edged higher to $2035, well off the $2014 lows seen at the end of last week following the solid US jobs report. The precious metal looks to be struggling for direction somewhat though, while resistance awaits around the $2050 level. In the absence of any uptick in safe-haven demand, the gold price looks likely to be dictated by the direction of the USD in the near term. If investors start to again feel better about interest rate cuts being on the horizon, the USD may unwind further which could see gold again knocking on the door of the $2050level.
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Elsewhere, Chinese inflation data due for release this week(on Thursday) will warrant some attention. The next batch of CPI and PPI data is expected to serve as a reminder regarding the deflationary struggles which are afflicting the world’s second largest economy. Any disappointment in the headline figures could be offset however by expectations of larger stimulus efforts by policymakers in Beijing.
