- Euro rebounds as ECB officials do not rule out another hike
- Dollar trades cautiously as Fed policy decision looms
- Wall Street nearly unchanged, gold extends gains
ECB policymakers push back on market bets
The euro strengthened against the US dollar on Monday, supported by relatively hawkish statements from ECB officials.
Following the ECB’s decision, which was interpreted as signaling the end of its tightening measures, several policymakers, including President Lagarde, made hawkish remarks indicating that further interest rate hikes cannot be ruled out. These statements contradicted market expectations of rate cuts for the next year. Slovak policymaker Peter Kazimir also echoed this sentiment, stating that only after the March forecasts will they know if the recent rate hike was the last or if further increases are still possible.
Additionally, the news that the ECB may soon start discussions on how to address the excessive liquidity in the market further supported the euro. This excess liquidity reduces competition for deposits among commercial banks and offsets the impact of ECB rate hikes.
However, despite the euro/dollar exchange rate returning above the key 1.0665 zone, investors remain cautious and seek more reassurance that there will be no rate cuts next year. Currently, more than 50 basis points worth of rate cuts are priced into the market.
Investors may find confidence in upcoming economic data, as recent reports have been unfavorable for the Eurozone. The preliminary Purchasing Managers’ Index (PMI) for September, which will be released on Friday, will be closely watched. If the data indicates a worsening economic situation, even if inflation remains high, the euro is likely to face renewed pressure. Market sentiment suggests that euro traders prioritize economic performance over inflation concerns, and data indicating a potential recession could lead to increased expectations of rate cuts.
Dollar traders await FOMC decision
The dollar retreated against most major currencies on Monday but has seen a slight recovery today. Dollar traders may be hesitant to take significant positions ahead of the Federal Open Market Committee (FOMC) decision tomorrow.
Market expectations are for the FOMC to maintain current policy rates, with only a 45% probability of another rate hike by the end of the tightening cycle. Despite the US economy being in better shape compared to other major economies, investors currently anticipate nearly 80 basis points worth of rate reductions for next year.
Therefore, if officials decide against a rate hike, attention will shift to the updated economic projections and the new dot plot. If recent data does not support the anticipated rate cuts, a dot plot indicating the possibility of another hike by year-end and/or fewer rate reductions could strengthen the dollar further.
Wall Street remains cautious; gold recovers above $1,930
The Dow Jones and Nasdaq indexes closed mostly unchanged on Wall Street, with the S&P 500 gaining only 0.07%. Similar to dollar traders, equity investors are adopting a cautious approach ahead of the FOMC decision. A hawkish outcome could negatively impact stocks, especially those of high-growth firms, whose valuations are based on discounted future cash flows.
Gold benefited from the decline in the US dollar and Treasury yields, rising above the $1,930 level. Even when the dollar was strong against other currencies, gold was relatively resilient, currently standing less than 8% below its record highs. This suggests that gold may be regaining some of its safe-haven appeal.
Oil prices continued their rally after the Energy Information Administration (EIA) reported that output in top shale-producing regions is expected to reach its lowest level since May. Concerns over supply have also risen due to Saudi Arabia and Russia’s decision to extend their production cuts.
