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The dollar index challenges expectations of interest rate cuts in 2024

19th Jan 24 4:10 pm

The US dollar index challenges expectations of interest rate cuts, supported by strong data and the Federal Reserve’s hawkish stance, with a continued short-term positive outlook.

Trading began on Friday at the level of 103.40 points, a pivotal and crucial level for determining price trends in the medium term, as it coincides with the 200-day simple moving average.

In recent trading sessions, the dollar index has stabilized in a range between 103.60 and 103.15 points. Traders and investors remain uncertain ahead of the upcoming meeting of the Federal Reserve next week.

Despite fading hopes for an interest rate cut, markets have only delayed their expectations for a rate cut until May. This makes it challenging for the dollar to strengthen significantly, despite recent positive data.

In my view, only one factor may push the dollar in either direction, which is the Consumer Confidence Index released by the University of Michigan for January, along with inflation expectations. Weak indicators, such as the Empire Manufacturing Index in New York and manufacturing numbers in Philadelphia earlier this week, may lead markets to raise expectations for an interest rate cut in March once again.

Looking at the recent retail sales report, there are indications of growth across almost all economic levels, suggesting that pressure on core inflation will remain stable for a longer period.

This coincides with coordinated statements from Federal Reserve officials calling for market expectations to remain stable until mid-2024 for the first rate cut. Markets continue to be warned against overpricing expectations of imminent monetary easing. I believe interest rate cut measures will be slower than expected.

Therefore, the dollar index is heading towards achieving its best performance in three weeks in the last six months ago. While there is a possibility of temporary sideways movement, a strong set of data, including the consumer price index, purchasing managers’ index, and gross domestic product figures next week, may witness the dollar continuing to dominate the markets.

I believe the renewed confidence in the dollar is driven by the recent performance of the 10-year Treasury bond yields, which rose with the latest job data surpassing expectations, revealing a strong job market. The significant decrease in initial jobless claims serves as a clear indicator of economic strength.

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