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Dovish Federal Reserve bends all markets

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A record high on the Dow Industrials, a pull-back in the dollar, and US 10-year treasury yields down at levels not seen since July this year are all from a dovish Fed.

 Jeremy Naylor | Analyst, London | Publication date: 

The commentary from Fed chairman Jerome Powell underscored the possible outlook for 2024 with rates expected by some to now start falling in the first half of the year.

(Video Transcription)

The Federal reserve

So it's all markets now fully expecting the Fed to cut interest rate next year. The green light certainly appears to have been switched on by the Fed. And 2024 certainly seems like the time when we could well see a reversal in some of these trends we've seen in some of the big central banks. It was certainly the case in the US yesterday where the Fed signaled it could start cutting interest rates next year if inflation continues to fall. It told the markets that the strong growth it wanted appears to be moderating. The labor markets coming back into balance, seeing inflation making real progress, according to Jay Powell telling reporters yesterday, these are the things we've been wanting to see. He said declaring victory would be premature.

But of course, the question is when would it become appropriate to begin dialing back in to some of the record high interest rates that we've seen in the Fed. It's between five and a quarter and five and a half percent in a forecast released by the Federal Reserve on Wednesday showed most policymakers expect lower key interest rates in 2024 after raising it to a 22 year high. So the Fed kept that target rate unchanged at between five and a quarter and 5.5%.

Now, Powell's comments rippled right the way throughout the markets. I want to begin first with taking a look at what's been happening of the dollar, because the dollar has risen to sort of pull back the dollar basket. Big declines yesterday, generating record highs on the Dow and gains across all of Wall Street yesterday. This is the effect on the currency markets pulling back below the 200 day moving average and indeed into the spike lower today. Trading at one point intraday in today's session at the low not seen since 11th of August this year. In amongst some of the other big market moves. Just a quick update on where we are in terms of some of the big moves including Japanese yen stronger against that US dollar the dollar pulling back to levels there at one point in today's intraday trade not seen since the 28th of July.

The US dollar

Now this pullback in the USD has meant that we've got money going into a lot of the dollar denominated commodities. Look at copper up about the 200 day moving average a big spike up in the session in today's trade. It's not just copper, it's also other areas. The market zinc up over 1% as well. Aluminum, another one where we've seen gains in today's session as a result of that pullback in the dollar.

And what this pullback in the dollar is also doing, it's hoping, traders are hoping that this will indicate that the potentially has the possibility of seeing some extra demand coming through in the market as well. Also, watch out as well in the London markets for some of the big mining companies. This is BHP gaining on the session in today's trading.

The Australian markets

The Australian markets up by a margin of almost 1%. It wasn't just that as well, it was things like Rio Tinto, another one where we've seen gains today. At one point Rio Tinto had closed this gap here that we heard back on the 5th of August 2021 to levels they're not seen since the beginning of August that year. So you can see that we've got a lot of money going into some of these base metals and it doesn't stop there either because we look at what's happening with some of the precious metals, big gains as well yesterday, the silver and we're building on that in today's session after the highs that we've seen that big pullbacks in recent because of concerns about the fact it was overdone but none of it. We've seen money continuing to go back into these markets. Spot gold, another one up above the 2000 level by some margin, 2030 as the markets bounce off this, 76.4% retracement.

Crude oil

And also what you what's happening with the price of oil, again, going back to what we've had in terms of some of the moves on expectations that we've got potentially extra demand coming through at one point yesterday that we saw a new six month low for the price of crude oil. This also coincided as well with the EIA crude oil inventory yesterday, talking about the fact that they've got this market, which is seeing some of the extra supplies being eaten up in the market. But oil on those not too far away from the recent lows, but nonetheless, oil benefiting from this swing lower in the US dollar on the back of that Fed interest rate decision.



This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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