- Federal Reserve Bank of New York President John Williams opposed market expectations for a rate cut.
- Data showed a rise in US factory production in November.
- There was a deeper-than-expected downturn in Eurozone business activity in December.
On Friday, currency futures pulled back from recent highs as Federal Reserve Bank of New York President John Williams opposed market expectations for a rate cut. At the same time, the dollar strengthened. However, it still had its worst weekly performance in a month.
Dollar risk reversal (Source: Bloomberg)
The dollar’s decline last week followed updated interest rate projections on Wednesday, revealing an expectation of 75 basis points in Fed cuts in 2024. Moreover, Fed Chairman Jerome Powell’s dovish tone at the FOMC meeting contributed to the decline. As such, demand for the dollar is at its weakest since 2020
However, Williams stated on Friday that the Fed is not currently discussing rate cuts, saying it was premature to speculate. Bipan Rai, North American head of FX strategy at CIBC Capital Markets, noted that this reinforces the Fed’s data-dependent stance. Rai highlighted that last week’s movement resulted from rebalancing positions heavily favoring the dollar, particularly against the Japanese yen.
Still, traders anticipate aggressive rate cuts, with the first expected in March and a total of 141 basis points in cuts by December.
On Friday, Atlanta Fed President Raphael Bostic mentioned that the central bank could begin reducing interest rates in the third quarter of 2024 if inflation aligns with expectations. Meanwhile, Chicago Fed President Austan Goolsbee also suggested a shift in the Fed’s focus to prevent rising unemployment.
Elsewhere, data on Friday showed a rise in US factory production in November. However, manufacturing faces higher borrowing costs and weaker demand for goods.
Still, as the year ended, the economy expanded despite the manufacturing sector experiencing mixed fortunes. On Friday, a survey revealed that in December, business activity increased, driven by growing orders and demand for workers in the services industry.
The euro and pound found support on Thursday as the ECB and BoE opposed rate cut expectations. Despite this, investors are heavily betting on rate cuts from both central banks in the coming year.
The euro was further impacted by surveys on Friday, revealing a deeper-than-expected downturn in Eurozone business activity in December.
Meanwhile, the yen strengthened ahead of the BoJ policy meeting. The Bank of Japan is the last major central bank to meet this month. Moreover, there was speculation about whether it would signal a departure from its negative interest rate policy.