The data releases and central bank meetings this week are likely to be eagerly awaited by market participants. The following table shows a personal selection of the most important events:
Since the last US CPI figures, the market has significantly lowered its expectations for the FED's future key interest rate. Up to 4 interest rate cuts are currently expected for 2024. In this respect, analysts' estimates of the CPI data will have to be confirmed tomorrow or, better still, deviate downwards. The market certainly does not want to see an upward surprise. The dovish expectations contrast with the yield trend on two-year Treasuries. Since last week's low, yields have risen by as much as 20 basis points to their current level of 4.74%. This discrepancy should perhaps not be overstated, but it could be a small indication that 4 rate cuts are really not a done deal.
In general, the market also seems somewhat complacent to me. Although Jerome Powell regularly tries to verbally curb the dovish expectations somewhat, the market doubts his credibility and expects the opposite. This is of course due to the experience of last year, when Powell raised interest rates even though he vehemently ruled out hikes in 2021. So are we experiencing the same plot twist twice? I am not sure about this.
My opinion on the dollar has not changed much recently. Falling yields and interest rate expectations should not help the dollar. However, short-term surprises to the upside could lead to strong dollar buying. With the end of the year approaching, thinner liquidity could then lead to extreme movements. In the medium term, however, I am sticking to my view that the Biden administration's money printing ("Bidenomics") will harm the dollar. The expansionary fiscal policy will ultimately also lead to inflation, but this may no longer be accompanied by sufficiently high interest rates. On the one hand, the FED does not want to put the economy under pressure, while on the other hand the interest burden on the US budget will rise sharply in the coming months as many government bonds will have to be refinanced. Extremely high levels of government debt, accompanied by comparatively low interest rates, make the dollar unattractive for investors. I have written a little more about this topic here.
The bearish dollar scenario is still valid. Shorts are at risk above the 104.40/55 resistance zone. Apart from the previous daily lows, I do not see particular downside support until the 102.50 mark.
Gool luck,
Sebbo