Markets React to Fed’s Hawkish Rate Cut
The financial markets were set ablaze last week as the Federal Reserve delivered a hawkish rate cut, sending shockwaves through stocks, bonds, currencies, precious metals, and cryptocurrencies. The Fed’s indication of a prolonged restrictive monetary policy sparked risk aversion, propelling the Dollar to emerge as the strongest performer in the currency markets. Surging yields and heightened Fed expectations supported the greenback’s dominance.
Despite its impressive gains, the Dollar hit a roadblock in its quest to break through key near-term resistance against the Euro. This failure suggests that further consolidation may be on the horizon, especially as the year-end holiday period approaches. It seems the Dollar might take a breather before gearing up for another rally in the new year.
European Majors and Commodity Currencies Face Turbulence
While European major currencies faced losses against the Dollar, they displayed resilience compared to commodity currencies and the Japanese Yen. The British Pound initially showed strength against the Euro and Swiss Franc but plummeted after the Bank of England’s dovish Monetary Policy Committee vote, dragging Sterling lower.
On the flip side, the Swiss Franc staged an unexpected recovery, finishing the week as the second-best performing currency, bouncing back from losses incurred after the Swiss National Bank’s 50bps rate cut earlier in the month. Meanwhile, the Euro lagged behind both the Franc and the Pound.
In the commodity currency bloc, the New Zealand Dollar suffered the most, reeling from a surprising Q3 GDP contraction that raised expectations of a deeper easing cycle by the Reserve Bank of New Zealand. Both the Australian Dollar and Canadian Dollar also ended the week as some of the worst performers in the market.
The Japanese Yen managed to fare slightly better than the Kiwi but still closed as the second-weakest currency. The Bank of Japan’s decision to maintain rates without signaling an imminent hike in January added to the currency’s decline. Governor Kazuo Ueda cited concerns about domestic wage growth and the impact of US trade and fiscal policies as contributing factors to the currency’s weakness.
Financial Markets Navigate Uncertainty Post-Fed
The US markets found themselves in a state of unease following the Fed’s hawkish rate cut, setting a high bar for future rate adjustments in 2025. This move left investors grappling with the implications of an extended period of restrictive monetary policy. The impact rippled through various asset classes, leading to significant movements in stock, bond, and currency markets.
Despite a modest recovery on Friday, all three major stock indexes closed the week notably lower. The Dow Jones Industrial Average experienced its lengthiest losing streak since the 1970s, including a substantial single-day drop midweek. While the medium-term uptrend remains intact for now, the recent pullback has not yet signaled a reversal to a bearish trend.
In the bond market, the 10-year Treasury yield surged above the 4.5% level, resuming its upward trajectory from September’s low. With momentum firmly on its side, yields appear poised to target the next resistance level of 4.73%. The rise in yields, combined with risk aversion, fueled the Dollar Index’s rally through the 108 resistance level. However, the Dollar’s gains were hindered by the Euro’s resilience, creating a somewhat uneven momentum for the greenback.
Precious Metals and Cryptocurrencies Grapple with Fed’s Policy Shift
Precious metals faced a challenging week as Fed’s hawkish stance weighed on market sentiments. Silver experienced its sharpest weekly decline in over five years, while Gold also felt pressure despite a slight lift from softer-than-expected US PCE inflation data. The resurgence in Chinese demand for Gold offered some support, but it was not enough to counteract the overall bearish trend in the precious metals market.
In the cryptocurrency realm, Fed’s policy shift sent shockwaves through the market, resulting in steep declines across Bitcoin, Ethereum, and other altcoins. Bitcoin displayed relative resilience, maintaining its post-election gains, while Ethereum faced more significant losses. The selloff led to substantial liquidations, marking one of the largest single-day wipeouts in recent memory.
Overall, the financial markets are in a state of flux as they digest the implications of the Fed’s hawkish stance, setting the stage for a period of uncertainty and potential volatility as we head into the new year. Investors and traders alike will need to stay vigilant and adapt to the evolving landscape to navigate the challenges and opportunities that lie ahead.