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USD Limping to the 2023 Finish Line

December 27, 2023

The USD is limping to the 2023 finish line, with the currency plagued by prospects of vigorous 2024 rate cuts. The soft Core PCE Price Index data delivered at the backend of last week was the latest blow to the greenback, with investors now more encouraged than ever that the Fed will perform a policy pivot sooner rather than later. How soon? Well, March is the hope, judging by interest rate futures. But data over coming months could shift expectations and reality as to when we might see the first policy move lowerf rom the Fed. But in the here and now, the Dollar is in the doldrums and will be facing an uphill battle whilst ever soft economic data reinforces theoutlook for a dovish 2024 tilt from the Fed.

Just a few months ago (in early October), the USD was riding high with the Dollar Index (DXY) trading above the 107 level. Bond yields werehigh, as were inflation prints. But how times have changed. Inflation hasreceded and the 10-year bond yield has fallen from above 5% to now sub-3.9%. In response, the DXY is now trading on a 101 handle rather than at 107.

While the USD is staggering to the end of 2023, the same can’t be said for gold, with the precious metal looking to end the year with momentum on its side. The fall in bond yields and the USD as inflation recedes has provided a boon for the gold price. The spot gold price was sitting at around $2066 during Asian trading hours on Wednesday. Liquidity is thinner than usual owning to the festive time of year which means that some market moves could be exacerbated. If the USD downtrend continues then gold could be eyeing off another run in the direction of the $2100 level considering expectations for the extent of Fed rate cuts next year.

Oil was on the move higher with events in the Red Sea againsparking supply concerns. Oil jumped over 2% after another container ship wasattacked. Heading into 2024, geopolitical events pose the biggest upside risks to the oil price. During Q3 this year, a spike in the oil price caused a shiftin inflation and therefore interest rate expectations. If oil did happen to flare up again next year this could upset market expectations for a Fed pivotgiven the inflationary implications. So, while the retracement of oil is moderatefor now, the energy market will be one to watch heading into next year. Particularly given the ongoing conflict happening in the Middle East.

The December rally has continued on equity markets with investors buoyed by the softer tone of US macro data. It’s a relatively light economiccalendar during this shortened trading week, so there is little in the way of macro releases to upset the rally. Though we could see some profit taking setin before year-end, which may act as a constraint on further immediate upside. Nonetheless, the upward trajectory of risk-assets illustrates that the SantaClaus rally was alive and well during December. Albeit with some able assistance from the Fed Chairman.

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