Analysts agree – the Federal Reserve is set to announce a 25-basis point rate cut during Wednesday’s meeting. Euphoria on the U.S. stock market remains strong, while positive data from the UK labor market supports the British pound.
Bond Market Does Not Expect Aggressive Rate Cuts
Tomorrow, we will learn the decision of the U.S. monetary authorities regarding the cost of borrowing. A rate cut of 25 basis points is almost certain. More attention is focused on the Fed’s “dot plot”, which will provide clues about future interest rate trends. Looking at the bond market and the rising yields of 10-year Treasury bonds, investors are factoring in a scenario where the FOMC takes a pause after tomorrow’s rate cut.
The movement in the bond market is somewhat surprising. Typically, rate cuts lead to higher bond prices and lower yields. In September, the yield was around 3.7%; now, it stands at 4.4%. This shift is reflected in the currency market, where the U.S. dollar is on a downward trend against the euro. The EUR/USD exchange rate is currently below $1.05.
Positive Momentum for the Pound
Among the G-10 currencies, the British pound stands out today, gaining against most currencies except the Japanese yen. This follows the release of strong UK labor market data. Wages increased by 0.9% in October compared to the previous month. Additionally, the number of unemployment benefit claims remains very low.
Wage growth may fuel inflationary pressures in the future, potentially preventing the Bank of England from cutting rates. This monetary policy outlook could be crucial for the pound’s future performance. For example, against the euro, a widening interest rate differential could favor the GBP.
Markets Soaring to New Heights
At the beginning of December, analysts questioned whether a Santa Claus rally would occur. The answer is now clear: the rally is happening. Euphoria on the Nasdaq is palpable, with the index rising by 1.20% yesterday, reaching new record highs. The S&P 500 is also following this trend, hitting historical levels.
Interestingly, global markets have not all joined this rally. For example, the WIG20 on the Warsaw Stock Exchange remains volatile. The last few days, including today’s 1.5% decline, have shown weak performance.
Today’s U.S. retail sales data slightly exceeded forecasts but did not trigger significant volatility in the FX market.
Author: Krzysztof Pawlak, Currency Analyst at Walutomat.pl
Source: ManagerPlus
