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On the trading day of Monday, the U.S. dollar experienced a decline due Fed Rate Cuts Speculations, reaching a two-month low and extending a downward trend noted in the previous week. This shift in market dynamics attributed to traders’ strong belief that U.S. interest rates have reached their peak. Leading to speculation about potential rate cuts by the Federal Reserve.
Concurrently, the Chinese yuan achieved three-month highs in both onshore and offshore markets. This surge supported by interventions from China’s central bank. Which also had a positive impact on the Australian and New Zealand dollars. Which frequently used as substitutes for the yuan due to their liquidity.
During the Asian trading session, the dollar index hit its lowest point since September 1, standing at 103.53. This represents a nearly 2% decline from the previous week, marking the most significant weekly drop since July.
In response to the weakened dollar, the euro reached its highest value since August at $1.09365. While the yen strengthened to a one-month high of 148.68 against the dollar.
Market Shifts Focus to Potential Fed Rate Cuts Amid Disappointing U.S. Economic Indicators
Following a series of disappointing U.S. economic indicators, particularly a below-estimate inflation reading, markets have discounted the possibility of further rate hikes by the Federal Reserve. Attention is now focused on the potential timing of the first Fed rate cuts. That with futures indicating a 30% chance of rate reduction as early as March. That according to the CME FedWatch tool.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, noted that market pricing for Federal Open Market Committee (FOMC) policy is expected to remain relatively stable. Providing few catalysts for significant dollar movement in the current week. However, she highlighted the possibility of further dollar weakening if risk appetite improves.
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The British pound edged 0.14% higher to $1.2480, nearing a two-month peak. While the euro traded at $1.09185 ahead of flash PMI readings in the euro zone scheduled for later in the week.
Market Outlook: Fed Meeting Minutes Anticipated, Potential Shift in Policy Discussed
This week, investors anticipate the release of minutes from the Fed’s latest meeting. Which could provide insights into policymakers’ considerations as they maintained rates for a second consecutive month. Vishnu Varathan, Head of Economics and Strategy at Mizuho Bank, suggested that the FOMC minutes might be perceived as a ‘Fed pivot,’ potentially favoring softer US Treasury yields and a weaker US dollar.
The Japanese yen continued to trade above 150 per dollar, registering a 0.3% increase at 149.17. In Asia, the yuan surged to over a three-month high against the dollar, both onshore and offshore, guided higher by the central bank and driven by exporters converting their dollar receipts.
Despite leaving its benchmark lending rates unchanged on Monday, China faces challenges in monetary easing due to a weakening yuan and a wait-and-see approach by policymakers. The yuan, having depreciated nearly 4% against the dollar this year in the onshore market. Which reflects ongoing concerns about China’s economic recovery and fragile investor sentiment.
Carol Kong from CBA expressed the view that the theme of a soft Chinese economic recovery will persist. Acting as a headwind for the yuan, Australian dollar, and New Zealand dollar in the near term.
FED Rate: Within the United States, the federal funds rate denotes the prevailing interest rate at which depository institutions extend uncollateralized. Also overnight loans of reserve balances to other depository institutions.
