The US dollar traded lower against all the other major currencies on Thursday, weighed down by the Fed’s decision on Wednesday to keep interest rates untouched, while pouring more cold water on expectations of one last hike in this tightening crusade. Fed policymakers struggled to determine whether an economy that continues to fire on all cylinders may need more restraint, but they also appeared uncertain on whether financial conditions are tight enough to bring inflation to heel. When asked if they maintained their hiking bias, Powell responded “that’s the question we’re asking. Should we hike more?”, adding that they will see how job and price data evolve until the December meeting, while closely monitoring the effects of high yields to the broader economy.
Dollar on the back foot ahead of NFP report
With all that in mind, market participants may now lock their gaze on today’s US employment report for September. Nonfarm payrolls are expected to have notably slowed to 180k from 336k and the unemployment rate is seen holding steady at 3.8%. As for average hourly earnings, they are expected to have ticked up in monthly terms, but the year-on-year rate is seen sliding to 4.0% from 4.2%.
- Dollar slides as Fed pours more cold water on hike expectations
- Spotlight turns to US employment report for October
- Pound receives little boost from BoE's hawkish hold
- Wall Street cheers potential interest rate peak, earnings help
Although officials did not close the door to another hike, investors are currently assigning only a 30% probability for that happening by January and they are penciling in around 75bps worth of rate reductions by the end of next the year. With the Fed placing extra emphasis on the jobs market and the 10-year Treasury yield dropping more than 20bps since Wednesday’s decision, a stronger than expected report, pointing to elevated wage growth, could still prompt investors to lift their implied rate path and reinitiate long positions in the dollar. Even if they don’t significantly increase bets of another hike, they may scale back a decent amount of basis points worth of rate cuts on signs that the economy is withstanding the pressure applied by the sharp rise in borrowing costs.
BoE does not see rate cuts any time soon
The pound received a small boost after the Bank of England also held its benchmark rate steady but reiterated its pledge to keep it high, stressing that they do not expect to start cutting any time soon. Policymakers voted 6-3 to stay sidelined, with the three dissenters favoring a 25bps increase, while at the press conference, Governor Bailey said that inflation is still too high and that they are determined to take it all the way down to 2%.
Yet, although the British currency finished the day higher against its US counterpart, it was lower against the euro, which suggests that the gains in Cable may have been owed more to a weaker dollar rather than a strong pound. Indeed, this is also supported by the market’s BoE implied path, which shows that investors are assigning only a 25% probability for another hike and around 60bps worth of cuts by December 2024.
S&P 500 closes above 200-day moving average
All three of Wall Street’s indices rose 1.7% or more, with the S&P 500 adding nearly 2%, recording its biggest daily percentage gain since April and closing back above its 200-day simple moving average. Hopes that the end credits of the Fed’s hiking campaign may have already rolled encouraged investors to add to their risk exposure and this is also evident by the fact that the risk-linked currencies were the main winners against the greenback.
Nonetheless, Fed expectations may not be the only driver behind the latest recovery in the stock market. Upbeat earnings could also be adding to the bullish mood as more than 80% of the companies reporting so far have beaten analysts’ estimates, with only 15% falling short of expectations.
What could now determine whether the rally will continue for a while longer or come to a halt is likely to be the US employment report later today.
