FX markets approach year-end on a high thanks to Fed

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Equities, risk-sensitive currencies extend gains

Global markets extended their recent gains overnight with the US’s Dow Jones index reaching new all-time highs and currencies like the Australian and New Zealand dollars reaching new four-month highs.

The moves were driven by yesterday’s Federal Reserve decision in which the US central bank kept interest rates on hold between 5.25% and 5.50% but signaled they expected the official rate to fall to 4.50% by the end of 2024.

The US dollar plunged on the news with the USD index falling to four-month lows.

The Aussie was one of the main beneficiaries with the AUD/USD up another 0.5% yesterday for a two-day gain of 2.1%.

ECB, BoE decline to join Fed’s party

The European Central Bank and Bank of England declined to join the party, however.

The ECB took a more concerned approach to the fight against inflation saying the markets had moved “too far too fast” in predicting rate cuts. The euro surged on the news.

The Bank of England stuck a similar stance as it indicated rates would need to stay higher for longer to contain inflation. The GBP/USD jumped 1.2%.

China growth key for 2024

Away from central banks, regional FX markets will be driven by growth expectations – especially from China.

Today, we get the key monthly data releases from China, including retail sales, unemployment and industrial production.

We anticipate that the slowdown in Chinese growth will be helped by base effects, with industrial production (IP) growth, which is expected to increase to 5.5% y-o-y in November from 4.6% in October.

In November, the compound annual growth rate from October levels likely drop to 4.6% from 5.0%.

The Chinese yuan has recently picked up strongly – ongoing improvement can weigh on the USD/CNH especially as the US dollar weakens.