Euro Down ahead of FOMC

The US dollar is keeping hold of most of Tuesday’s gains as we enter the American trading session as expectations of an aggressive series of rate cuts by the US Federal Reserve is looking less likely by the day.

As the end of the year 2023 came to a close, CME Fed Fund probabilities at one stage showed markets expecting 175 basis points of rate cuts this year with the first move seen in March. This has now been reduced by a quarter of a point to 150 basis points of cuts. The end dovish tone was fuelled by Fed Chair Powell at the last FOMC meeting and today’s release of the minutes of this meeting may show that the market’s interpretation of Chair Powell’s remarks may have been misplaced.

The latest business data out of the US may have backed up that misinterpretation when The ISM Manufacturing PMI improved to 47.4 from 46.7 in the previous month, surpassing at the same time market consensus at 47.1.

Extra details of the release showed the ISM Manufacturing Employment rose to 48.1 (from 45.8), ISM Manufacturing New Orders eased to 47.1 and finally ISM Manufacturing Prices decreased to 45.2.

The highlight of the trading session will be later today with the release of the FOMC minutes and as mentioned above despite earlier market optimism, immediate rate cuts are not likely.

The optimism hinges on the idea of a US "soft landing" leading to a "new growth era," drawing parallels with the 1994-1995 period, Macquarie strategists said in a note today.

However, Macquarie is wary of overstating this analogy, highlighting significant differences in macro conditions between 2023-2024 and 1994-1995.

“The Fed has tightened much more in the recent cycle, leading indicators are chronically weak, and there's no 'peace dividend' to enjoy, among other big differences with the roaring 90s,” the strategists said.

“The Bottom Line is that while the Fed did successfully engineer a soft landing in 1994-1995, and a new growth era was ushered in on the heels of an ongoing disinflation that followed, we'll remind readers that the structural, cyclical, and liquidity backdrops behind that 'soft landing' were radically different than they are now.”