FOMC Meeting: A Disappointment for the Dollar

The US dollar took a hit following the Federal Reserve's meeting, with the American currency index retracting by 107 points to 106 on Thursday, down from its recent high. The increased supply of the dollar was influenced by a rally in Treasury bonds, with the yield on two-year bonds losing roughly 10 basis points. Even more significant were the changes in long-term bond yields, as the 10-year Treasury traded at 4.71% on Thursday, a 19-point drop from pre-FOMC levels. Lower Treasury yields made Treasuries less attractive to investors outside the US, which, in turn, added pressure on the dollar:Futures on the Fed rate revised the probability of a December rate hike, reducing it to less than 15%. At the same time, there was a slight uptick in the likelihood of a Fed rate cuts in 2024. The US stock market also responded positively to the FOMC meeting, with the three major US equity benchmarks, SPX, Nasdaq, and Dow, posting gains ranging from 0.6% to 1.8%. Nasdaq outperformed the others, thanks in part to the rebound in long-term bond yields, which are closely related to growth stocks in terms of the duration of expected cash flows.A series of weak economic data points in the US yesterday amplified the market's collective sense that the Fed is nearing the end of its tightening cycle. According to the ADP report, job growth in October was 113K, falling short of the expected 150K. A more significant surprise was the sharp decline in US manufacturing activity in October compared to the previous month, with the PMI index dropping from 49 to 46.7 (the forecast was 49). While the manufacturing sector doesn't play a pivotal role in determining the overall economic trend due to its low contribution to aggregate output, the stark deviation from the forecast triggered speculation of a slowdown in overall economic activity, which is expected to be reflected in other data points. In this regard, today's report on initial jobless claims will be crucial, shedding light on the current state of the labor market, a key inflation driver in the US economy. Powell emphasized yesterday that labor demand continues to outpace labor supply, despite signs of cooling, underscoring the labor market's significance in maintaining high inflation. In recent weeks, the weekly rise in jobless claims has remained near cyclical lows (200K):The Bank of England left its interest rate unchanged, with the voting distribution aligning with expectations: 6 committee members voted to keep the rate steady, while 3 members voted to increase it. Nevertheless, in the accompanying statement, the central bank attempted to persuade the markets that further tightening is possible if the data necessitate it, and it appears to have succeeded. The pound reacted with an increase, pushing GBPUSD to a weekly high of 1.22.Tomorrow, the market awaits the NFP report, and if the numbers disappoint, expectations for a December rate hike will likely collapse, pushing the dollar into a deeper decline. Job growth is expected to be around 180K, almost half the September figure (336K). No change in the unemployment rate is anticipated (3.8%), and wage growth is expected to slow to 4% annually. Also tomorrow, the non-manufacturing activity assessment from the ISM, the second most significant report of the week, is due. A slight slowdown to 53 points is expected after a 53.6 reading in September, suggesting that expansion in the sector remains intact.