Top Trumps
Geopolitical risks are outweighing macroeconomic fundamentals in today’s markets. We can see this very clearly from the muted reactions in price being generated from major macro events including data and interest rate decisions. The same holds true of the Fed’s interest rate decision where markets barely blinked at a Fed that had changed its tune significantly from earlier this year. Instead, it is oil and commodity prices and the geopolitical factors behind such price moves that are establishing themselves as the key drivers for the Dollar and FX in turn.
There remains a case to argue that some of that limited reaction deserves to be put down to the degree of uncertainty that the Fed cited. Because of that uncertainty, the potential paths that future policy making may take are far broader and more numerous as a result, leaving markets questioning the Fed’s words. The Fed yesterday kept rates on hold making no adjustments to current policy. The median forecast for 2025 showed no change with two rate cuts still expected. A raise in December’s core PCE forecast trimmed expectations for the number of rate cuts next year. Despite the bias towards rates remaining higher for longer, something that is typically Dollar-positive, key Dollar crosses failed to break outside of their intraday ranges yesterday.
Markets have been speculating on US intervention in Iran. Israeli-Iranian conflict is sufficient to increase regional risk and boost the oil price but it is clear that it is the role of Trump’s words on foreign policy and the potential for US intervention that is spooking the Dollar higher. There would have to be evidence from here of a further escalation in the conflict in the Middle East and in particular a real disruption to the supply of oil from the region if such moves in oil and the Dollar are to extend. Whilst markets continue to focus on this region and on commodity prices, high salience data may continue to underwhelm.
Discussion and Analysis by Charles Porter
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