Expectations for a March rate cut by the US Federal Reserve have diminished, giving a boost to the US dollar. The currency has sustained its strength in the Asian trading session, breaking above the 200-day moving average at around 103.50.
This upward momentum follows the release of a robust nonfarm payrolls report, revealing significant growth in US employment and reducing anticipation for Fed rate cuts in the coming months.
The implied yield on the December 2024 Fed fund futures contract has risen by 28 basis points since the beginning of the month, indicating a shift in market sentiment. The market now prices in approximately 118 basis points of rate cuts by year-end, with a notable change in expectations for a March rate cut. Initially, the market projected a 4-basis point cut in March, but the stronger payrolls data has made it less likely for the Fed to act so soon, aligning with their stance from the last FOMC meeting.
Fed Chair Powell reiterated this viewpoint in a recent interview, emphasizing the need for caution to ensure sustained economic improvement. Powell mentioned the risk of moving too soon and expressed the importance of giving more time to confirm that inflation is heading towards the target of 2.0%. He also indicated that policymakers are not likely to make dramatic changes to their 2024 forecasts for the Fed funds rate in the upcoming March update.
Given Chair Powell’s comments and the positive nonfarm payrolls report, it is now more probable that the Fed will delay rate cuts until May or June. The robust employment growth in January further supports this cautious approach, suggesting that the US economy remains resilient to higher rates.
While concerns over the health of US regional banks and potential commercial real estate losses pose a downside risk to the US dollar, the overall outlook for the currency in Q1 remains positive.
Market commentary and analysis from Luca Santos, currency analyst at ACY Securities
