Written by Steven Dooley, Head of Market Insights
Global overview
The US dollar index fell from 11-month highs overnight as the Federal Reserve’s November rate decision suggested the US central bank might have finished raising rates. The Fed has raised rates on just one occasion since May. The AUD/USD was the largest beneficiary. Today, we have rate decisions from Malaysia and the UK.
Fed on hold, but markets react strongly
The US dollar was sharply lower overnight as evidence continues to build that the Federal Reserve is near the end of its tightening cycle.
In its decision, the Fed kept rates on hold at 5.25% to 5.50%.
While Fed chair Jerome Powell left the door open for further rate hikes, his comments that the risks are now “balanced” between doing too little versus doing too much suggests the Fed might be done.
Most notably, markets now confirm this belief, with a just 0.5% chance of a hike in December and an incredible 180 basis points of cuts priced into the end of 2024 – suggesting official US rates will be at 3.53% at the end of next year.
US bond yields and the US dollar tumbled while the AUD/USD jumped 0.9%. The NZD/USD gained 0.6%.
In Asia, the USD/SGD and USD/CNY were broadly flat.
GBP pressured ahead of BoE
The Bank of England looks likely to maintain rates at 5.25% even if the data leading up to the November meeting is less certain than the consistently negative prints seen before the September decision. Increased global bond yields and geopolitical worries (despite the latter’s possible effect on oil prices) also argue against higher rates.
However, market pricing of just 2bp for this week seems a little too comfortable given that the three members (excluding Cunliffe, who departs the Committee before the meeting) who want higher rates in September are likely to vote again for a rate rise in November. Particularly if the Bank is forced to adjust its medium-term inflation outlook upward due to rising energy costs and the falling GBP.
In short, like in the US, the current cycle of UK hikes looks to be coming to an end and rates are likely to decline in the third quarter of 2024. If so, the GBP could be pressured into the medium term.
MYR at all-time lows ahead of BNM decision
Malaysia’s central bank has its last meeting of the year today and the Bank Negara Malaysia (BNM) is expected to hold its overnight policy rate (OPR) at 3%. The policy statement will likely resemble the last meeting, when the central bank took a dovish stance by highlighting negative risks to the GDP outlook and lowering inflation.
Recent data releases indicate that inflation is continuing to decline and that growth is tracking below BNM’s projections. Furthermore, the lack of information on subsidy rationalization in Budget 2024 implies that BNM would stick to its position that changes in subsidy policy might affect the inflation forecast, rather than indicating that upside risks to inflation are beginning to materialize.
All things considered, we anticipate BNM to restate that the present monetary policy stance is consistent with the existing assessment of inflation and growth forecasts and continues to support the economy. More broadly, with USD/MYR at all-time highs, any weakening in the US dollar might be the major driver of any MYR recovery
Aussie at three-week highs after Fed
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 30 October – 4 November
All times AEDT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
