Markets heed hawkish Fed

Risk sentiment was forced to turn lower as the Fed delivered its higher-for-longer messaging to markets, projecting fewer-than-anticipated rate cuts for 2024. With potentially one more rate hike to come this year, the US dollar moved back closer to its year-to-date high while global equities tumbled, though spot gold was able to mitigate its losses.

Following the Fed’s latest commentary, markets have now pared bets for US rate cuts in 2024, with next year’s median rate in the dot plot revised up by 50 basis points higher than June’s projections. Chair Powell admitted that a rate cut “will come” but refrained from saying when.

US rates that are kept higher for longer are set to erode an expected tailwind for US stocks and spot gold over the coming year; even a soft landing may not be in the best interests of the bulls. Furthermore, the threat of $100 oil could revive the need for additional rate hikes, further delaying central bankers’ victory lap against still-stubborn inflation.

However, an erosion of US economic resilience, perhaps via the UAW strikes, government shutdown, or a steep drop in consumer spending, may hasten the Fed’s eventual rate cut while potentially providing some year-end cheer for risk-taking activities across global financial markets.

BOE decision on knife’s edge

Markets have slashed bets for another 25-basis point hike by the Bank of England today, with such odds now standing at 48%, in stark contrast to the 80% chance priced in this time last week.

Yesterday’s lower-than-expected August inflation prints are expected to bind the hands of MPC hawks. A rate hike today may even confirm that UK rates have peaked for this cycle.

Dovish signals out of the BOE today, even if it were accompanied by a rate hike, could see GBPUSD bears potentially gunning for the 1.20 psychological level.