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USD climbs as stocks get choppy post-FOMC
Updated Updated Fri, 2024 December 20 04:17
* Dollar strengthens as market digests Fed’s hawkish rate cut
* S&P 500, Nasdaq fall, Dow breaks 10-day historic losing streak
* BoE keeps rates unchanged, signals further cuts are imminent
* BoJ stands pat, Ueda strikes dovish tone and yen weakness raises chance of intervention
FX: USD continued to get bid higher as the more hawkish than expected FOMC meeting continued to impact financial markets. US Treasury yields moved higher with the widely followed 10-year nearing the May highs. The year-to-date top is at 4.73%. See below for more comments on the Fed.
EUR was mid pack in the majors as prices desperately tried to consolidate above the November trough at 1.0331. Eurozone/US spread differentials widened with the two-year gap likely making it very tough for the euro to bounce.
GBP suffered as it was the second worst performing major on the day. The BoE left rates steady at 4.75% as expected. But the 6-3 vote was a mild dovish surprise (six favouring a hold, three a cut) even if forward guidance remained cautious and data dependent. There is now more than a 50% chance of a cut at the next meeting in February. The breakdown in cable means next support at 1.2486 is near, ahead of the April low at 1.2299.
USD/JPY surged higher as the yen dramatically underperformed its peers. As forecast, the BoJ kept rates at 0.25% for the third time. But that unchanged decision and dovish comments from Governor Ueda hit JPY hard. He emphasised the need to wait for more data, including wage hikes in early March next year. The rising 10-year US Treasury yield also put the boot in. The irony is that the more dovish governor is perceived to be putting pressure on the BoJ to hike sooner, the more USD/JPY rises. We are approaching previous intervention levels around the 158/160 zone.
AUD tried to steady afterbreaking sharply lower below major support around 0.63 from the lows in October last year. The October 2022 bottom looms at 0.6169. USD/CAD posted a fresh high at 1.4466 before getting sold below 1.44 in overbought conditions. Domestic politics, Trump potential tariffs and two central banks at opposite ends of the rate cycle have all hurt the loonie.
US stocks: The S&P500 closed down 0.09% at 5,867. The tech-heavy Nasdaq settled 0.47% lower at 21,110. The Dow finished at 42,342, up 0.04%. Sectors were mixed with Utilities, Financials and Tech outperforming, while Real Estate, Materials and Energy lagged. Micron fell more than 16% as revenue and profit guidance disappointed overnight late Wednesday Eastern time. The memory and storage product maker flagged weakness in its consumer-oriented markets.
Asian stocks: Futures are mixed. Asian equities traded in the red after the major selling Stateside after the hawkish FOMC meeting. The ASX 200 was impacted by a tech sell-off and struggling gold. The Nikkei 225 clawed back some losses, but it was generally choppy price action. China indices moved lower after the FOMC meeting. Chair Powell commented that Trump tariffs may have been included in some officials’ projections.
Gold tried to pick up, but most of the gains post the Fed losses were given back through the day. The November low at $2536 is a key low.
Day Ahead – FOMC Thoughts after momentous meeting
The Federal Reserve cut rates by 25bp as expected, but the broader policy message was much more hawkish than expected. The new dot plot projections were heavily revised, now only factoring in 50bp of additional easing in 2025, and one FOMC member voted for a hold. Furthermore, policy has entered ‘a new phase’, and barring major downside data surprises, the Fed expects a slower pace of rate cuts starting from January.
The big shock was those updated median dots. They now project only a single 25bp cut every six months for the next two and a half years, while the longer-term dot was raised by 0.1% to 3.0%. Chair Jerome Powell said that the Fed will be more cautious moving forward and that more progress on inflation is needed for further cuts. Remember, the dovish shift by the Fed a few months ago was triggered by concerns about the jobs market. Wednesday saw Powell state that the risks to the labour market had diminished, effectively removing any sense of urgency when it comes to more policy easing. That is where we are heading into 2025.
Chart of the Day – Gold settles on Fib level
Gold saw heavy selling on the hawkish FOMC meeting as the dollar and yields surged higher. A non-yielding asset, the precious metal does not benefit from higher rates as the opportunity cost of holding gold is higher. That menas tighter monetary policy is a headwind for bugs. Of course, continued geopolitical tensions underpin support for gold, though President-elect Trump has vowed to end the conflict in Ukraine on day one of his administration.
Prices have fallen to the Fib retracement (38.2%) of the May to October move higher at $2594. The 100-day SMA sits at $2606. The midpoint of that move tallies with the November low at $2536.
