10 November 2023
Dear clients,
A dark cloud is spreading over Europe after Fed Chairman Jerome Powell made it clear that fighting inflation remains the central bank's top priority and warned that rate hikes are still on the table, while investors gave up trying to rally in risky assets.
After the Fed left rates unchanged last week, markets were increasingly convinced that the peak of U.S. rate hikes was just around the corner. But then Powell came along and dashed any hopes of a rate cut anytime soon.
"The Fed is committed to pursuing a monetary policy tight enough to bring inflation down to 2% over time," Powell said. "We are not confident that we have reached that position. If there is a need to tighten policy further, we would not hesitate to do so."
That sent stocks tumbling, with MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) falling 1% to its lowest level in a week. Futures indicate the somber mood on European bourses will persist.
ECB President Christine Lagarde is scheduled to speak in a "fireside chat" later in the day and traders will be watching every word.
U.S. Treasury yields rose overnight amid Powell's comments as well as a weak $24 billion 30-year Treasury bond auction. Yields remained elevated during Asian hours.
The rise in yields led to a rise in the dollar, for which this week was the best week against the yen in three months.
U.S. rate futures put the probability of a rate cut at the Fed's June 2024 meeting at 60%, according to the CME exchange's FedWatch tool. Before Powell's speech, that probability was around 70%.
Meanwhile, the U.S. unit of the Industrial and Commercial Bank of China was attacked by a ransomware virus that disrupted trading in the U.S. Treasury market on Thursday.
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