Morning Brief – A revised 2024

Charles Porter
Thu 21 Sep 2023

A revised 2024

The Dollar opens stronger this morning following the Federal Reserve’s decision last night. The decision confirmed interest rates were to stay on hold following this meeting. As we have highlighted following previous decisions, the forward guidance offered by the Chair Jay Powell was once again underwhelming. However, the Dollar’s bid this morning comes from the underlying message of the rate setting body, the FOMC. Despite rates being held at their 5.25%-5.5% target during the meeting, the forecasts published confirm a significant majority of the Committee expect at least one more hike this year. 

With 12 rate setting members expecting a further hike this year versus 7 foreseeing no further upward interest rate hikes, last night’s decision was just about as hawkish a pause as you might imagine. Not only did the Fed’s Committee confirm they were not finished hiking, they also dramatically altered their expectations for how many rate cuts may take place next year. This element was the key to the market impact of the overall Fed decision. In particular, implied yields priced by the market for next year and for the back end of the curve spiked as investors sold longer dated treasuries. When the last set of projections were released in June, the Dollar was undermined by confirmation that rate setters expected a lofty 1% of interest rate cuts in 2024. Comparing the most likely outcome based upon last night’s set of projections, just 0.5% worth of cuts, is now expected. 

The message of higher US rates for longer and confirmation of an enduring battle with inflation next year should raise USD prospects further. Based upon the disparity between the latest Fed and ECB decisions, there is a non-negligible chance of EURUSD returning to parity. Given the Dollar has already had a significant rally in the past few months to reach its current level, what might bring it down from here? The most likely catalyst could be data, particularly growth data this time around. The Fed will only be able to maintain their outlook and market stability if the investors continue to believe it can avoid a hard landing. Where growth starts to falter, the economic disparities between Europe and the US will close and the Fed will struggle to maintain its higher for longer narrative.

Discussion and Analysis by Charles Porter

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