Concerns from prominent central bankers regarding aggressive rate cut expectations have convinced markets to ease off, providing a lift to the dollar and US yields. BoJ, ECB provide updates after their respective meetings and 4th quarter GDP and PCE figures in the US are likely to add volatility.
(AI Video Summary)
In this video, Richard Snow (DailyFX Strategist) and Nicholas Cawley (DailyFX Senior Strategist) talk about recent events in the market and what we can anticipate next week. They mention how changes in interest rate expectations have affected the market. The Fed, which is responsible for monetary policy, has warned that current market pricing assumes more rate cuts than policy setters deem appropriate currently. As a result, short-term US Treasury yields have gone up, and the value of the dollar has increased.
Inflation in December also showed signs of stubbornness, adding to the support for the dollar and recovering yields. Currently, inflation is high, but is likely to continue to go down in the future as base effects subside. December inflation prints lacked evidence of generalised price pressures and even though recent reports show higher inflation, it doesn’t necessarily mean that prices will keep rising.
Looking ahead to the next week the Bank of Japan is not expected to change its policies but there remains a possibility that the Bank of Japan could verbally ‘intervene’ to stop the rise of the dollar compared to the yen. This is important for Japan because they want to control how much their currency is worth in relation to other currencies.
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Next week we’ll get insight on PMI data, which shows how the economies of the Eurozone, UK, and US are doing at the beginning of the year. It is also important to note the upcoming interest rate decision by the European Central Bank, which is expected to stand pat on rates while markets will look for clarity on timing of rate cuts as the Governing Council seems split on whether the matter of rate cuts is appropriate for discussion yet or not.
Then on Thursday Q4 GDP data is due for release for the US, which will tell us how much the economy has grown. The US economy is slowing down towards a more sustainable pace given the global backdrop, but the GDP numbers will give us a clearer picture.
The Nasdaq, a stock market index, has been doing well, largely due to technology stocks. They also mention that the upcoming earnings season will be interesting to watch as the first of the mega-cap tech stocks report quarterly earnings next week.
Lastly, gold attempted to rally into the weekend which could gain in popularity if in the event a safe haven is desired in response to elevated tensions in the Middle East and Houthi strikes on western-linked shipments in the Red Sea. There are some key technical considerations for gold with the possibility of it breaking out to even higher prices.
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