Fed rate cuts? You’re Barkin up the wrong tree

Market reports
Thanim Islam
  • Fed members at odds over inflation
  • US economy continues to outshine
  • Inflation in Europe coming down
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Price action over the last few days truly shows the indecision in markets coming into month-end. Fed member Thomas Barkin poured water on Christoper Waller’s dovish comments on Tuesday, by stating he was sceptical for being on track for inflation coming down to 2%, and that another rate hike was not off the table. Fed Raphael Bostic backed Waller's comments, but this time markets reacted to the hawkish comments, and we saw USD retrace some of its losses from Tuesday.

US data was mixed in the afternoon, with US GDP for Q3 being revised higher from 4.9% to 5.2%, but core PCE over the same period was revised lower to 2.3%. This all contributes to the soft landing argument for the US economy.

EUR weakened across the board after Spanish and German inflation numbers for November came in lower than expected, increasing the amount of rate cuts for next year.


Market rates

* Daily move - against G10 rates at 7:30am, 30.11.23

** Indicative rates - interbank rates at 7:30am, 30.11.23

Table (25)-1

Data points

Table (26)-1


  • None today.

Our thoughts

EUR and USD moves are in focus today with the release of their respective inflation readings for November and October. It seems likely that EU inflation numbers will come in lower than expected, if we base this on the Spanish and German numbers yesterday and the numbers from France this morning, and if so then expect rate cut bets to shore up and the EUR to weaken. As we know, the weakness of USD has been a month-long trend as the Fed rate cuts narrative really took hold following the weaker CPI print earlier this month. Today's core PCE number, as we well know, is the Fed's preferred gauge of inflation, and depending on the result could well continue this trend going into December, or the end of the month could mark the end of the rout on USD.

Chart of the day

A rebound on USD will hinge on key data points over the next few weeks, and first up is today's core PCE inflation numbers. Markets are expecting a decline from 3.7% to 3.5% year on year for the month of October, and as ever we look to see what the deviation is going to be from this expected number. Anything to indicate inflation isn’t slowing and we will likely see markets start to cover their USD shorts, and thus see GBPUSD and EURUSD fall from their two-month highs.

30112023 cotd
Source: Bloomberg Finance L.P.

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