Dollar and gold rise in tandem as Fed rate cut bets pared back

Rate cut bets suffer another blow 

Hopes for an early rate cut by the Fed were dashed again on Monday following yet another upbeat data release out of the US. The ISM manufacturing PMI rose more than expected in March, climbing above 50 into expansionary territory for the first time since September 2022. Moreover, the prices paid sub-index also rose, hitting the highest since July 2022, in a fresh sign that inflationary pressures have not totally dissipated.

The strong PMI reading comes hot on the heels of Friday’s tamed core PCE print and Fed Chair Powell’s somewhat hawkish remarks. Whilst the CPI and PCE data continue to support the notion that inflation remains broadly within a downward trajectory, albeit an increasingly shallow one, other indicators underscore the Fed’s caution on the price outlook.

Subsequently, a rate cut as early as June is starting to look doubtful and the odds of a 25-basis-point reduction in the Fed funds rate have dropped to around 60%. More importantly, investors are now pricing in fewer cuts for the whole of 2024 than what the latest FOMC dot plot projected only a couple of weeks ago.

Euro and pound feel the brunt of dollar’s resurgence 

Treasury yields surged on the back of the data, with the 10-year yield gaining 13.5 basis points. The jump in yields fuelled a fresh rally in the US dollar, which extended its gains to four-and-a-half month highs against a basket of currencies early on Tuesday.

The euro and pound both slid to one-and-a-half month lows against the US currency as a June rate cut remains in play for the ECB while investors are also increasingly confident that the Bank of England will be able begin its easing cycle during the summer, which contrast with the growing uncertainty surrounding the timing for the Fed’s first move.

Yen propped by more verbal intervention 

The yen was still confined within a tight range, hovering around 151.60 to the dollar, as traders were vigilant about a possible intervention by Japanese authorities near the 152 level. Japan’s finance minister repeated on Tuesday that officials “will take appropriate action against excessive volatility”, prompting a slight firming in the yen.

The next focus for FX markets this week will be the flash CPI numbers out of the Eurozone on Wednesday, followed by the ISM services PMI, culminating with the nonfarm payrolls report on Friday.  It will also be a fairly busy week for Fed talk. Williams, Daly and Mester are due to speak today and Powell will make another appearance tomorrow.

All calm on Wall Street 

However, it remains to be seen whether any of it will do much to dent confidence on Wall Street. The S&P 500 slipped by just 0.2% on Monday even as yields spiked and rate cut expectations were scaled back. This probably suggests that investors want to see more evidence that there’s a substantial risk of inflation not falling to 2% within the next few months before turning bearish on stocks.

US futures were slightly in the red on Tuesday amid mixed sessions in Europe and Asia.

Gold sets sights on fresh record highs 

What comes as a bigger surprise, though, is how gold has not only managed to avoid a selloff, but it has also scaled fresh heights in unchartered territory. The precious metal hit a new all-time high of $2265.49/oz on Monday before pulling back after the ISM data. But it is rebounding today, in a sign that other forces such as central bank buying and demand from private investors remain as much, if not more of a driving force than the inverse relationship with bond yields.

Oil futures were also up on Tuesday ahead of tomorrow’s OPEC meeting where no change in quotas is expected. But escalating tensions in the Middle East are keeping the upside pressure on prices.