Treasury Yields and Dollar Gain as Rate Cut Expectations Drive Markets | Daily Market Analysis

Key events:         

• USA - Initial Jobless Claims
• USA - PPI (MoM) (Oct)    
• USA - Crude Oil Inventories
• USA - Fed Chair Powell Speaks

The S&P 500 inched up Wednesday as Treasury yields rebounded from session lows, despite inflation data coming in as expected, keeping a potential December rate cut in play.

The Dow Jones Industrial Average rose by 47 points (0.1%), the S&P 500 gained a slight 0.02%, while the NASDAQ Composite dipped by 0.2%.

Treasury yields, having initially fallen, rallied later in the day as investors assessed the Federal Reserve's next moves. Inflation data reinforced views that the Fed might trim rates in December, although it could maintain a cautious pace with cuts in 2025 if inflation continues to moderate.

The USD/CHF pair continued its upward trend on Thursday, gaining momentum following a technical breakout above the 200-day Simple Moving Average (SMA) earlier in the week. This rise marked the pair's fifth consecutive daily gain and placed spot prices at 0.8875, their highest level since late July. The pair’s rise aligns with the US Dollar’s recent rally, which has pushed to a new year-to-date peak amid continued optimism for US growth prospects under President-elect Donald Trump’s anticipated policies. Investors are betting that Trump’s proposed protectionist measures may accelerate inflation, possibly causing the Fed to pause its easing cycle. As a result, the Greenback has maintained its strength, acting as a tailwind for USD/CHF.

US inflation data released Wednesday affirmed expectations for a December rate cut against a backdrop of a softening labor market. Despite these prospects, inflation’s steady but slow path downward could mean fewer rate cuts next year, as the Fed remains wary of triggering an unexpected economic slowdown. This outlook, combined with hawkish remarks from several Fed officials, has kept Treasury bond yields close to multi-month highs, adding further support to the Dollar.

Meanwhile, the BoE is taking a more conservative stance on rate adjustments, which has weighed on the GBP/USD pair. In Thursday’s Asian session, GBP/USD extended its decline, falling to around 1.2685 as the Dollar climbed to a peak unseen since November 2023.

The Bank of England’s stance has been relatively dovish in comparison to its counterparts. While markets have largely priced in only two quarter-point cuts by the end of 2025, BoE policymakers are cautious about making aggressive cuts. Bank of England Governor Andrew Bailey is scheduled to speak later on Thursday, and traders are closely watching for any signs of a shift in policy tone. Recently, BoE policymaker Catherine Mann remarked that the central bank might be able to delay significant rate reductions, as monetary policy seems to be impacting inflation more quickly than conventional models anticipated. Any less-dovish remarks from Bailey could lend support to the British Pound and mitigate some of the pressure on the GBP/USD pair.

The Australian Dollar faced further losses against the Dollar on Thursday, following the release of key economic indicators. Consumer Inflation Expectations in Australia fell to 3.8% in November, down from 4.0% in October, marking the lowest level since October 2021. Meanwhile, Australia’s seasonally adjusted Unemployment Rate held steady at 4.1% in October for the third straight month, which is in line with market expectations. Employment growth, however, fell short of forecasts, with only 15.9K new jobs added in October compared to the expected 25.0K. Reserve Bank of Australia Governor Michele Bullock commented that current interest rates are sufficiently restrictive and will remain so until inflation trends become clearer. She also emphasized that the RBA would avoid swift decisions in light of uncertainty around the Fed’s potential actions.

In Japan, the Yen continued to experience selling pressure during Thursday’s Asian session, lifting the USD/JPY pair above 156.00 for the first time since late July. Japan’s political climate suggests that the Bank of Japan may face challenges in tightening its monetary policy further. In addition, the potential effects of US protectionist policies under Trump could pose risks to Japan’s economy, further weighing on the Yen. The Greenback’s strength, fueled by expectations for US inflationary growth and a possible Fed pause in rate cuts, has driven US Treasury bond yields to multi-month highs. This rally in yields has contributed to a shift away from the lower-yielding Yen, raising the prospect of intervention from Japanese authorities to support their currency.

Looking ahead, investors are focusing on upcoming US data, including the Initial Jobless Claims and Producer Price Index (PPI), for further signals on the Fed’s likely course. In Japan, market participants are watchful of potential measures from Japanese policymakers to stabilize the Yen, should the Greenback’s ascent continue unchecked.