Article by: ETO Markets
The US dollar recently faced pressure due to the Federal Reserve's cautious stance and lower inflation numbers. The Fed hinted at the possibility of more rate cuts in 2024 than initially anticipated. This week, the focus will be on the impact of November’s Personal Consumption Expenditures (PCE) figures on the US dollar, which could strengthen the case for earlier rate cuts next year.
In the Asian session on Wednesday, Japan will release trade data, and no changes in interest rates are expected from China. The UK inflation figures will be a significant highlight of the day. Additionally, the US will release housing data, the Swiss National Bank will issue its quarterly bulletin, and the Bank of Canada meeting minutes will be made public. Investors will closely monitor Wall Street for any signs of a Santa’s rally.
Despite efforts by US Federal Reserve (Fed) policymakers to resist expectations of potential interest rate cuts in the coming year, the market's outlook for rate reductions remains unchanged. The likelihood of a Fed rate cut in March is currently estimated at around 75%, while a cut in May is almost certain.
Ongoing expectations of a dovish Fed stance in 2024 are impacting US Treasury bond yields and the US Dollar, particularly during a week with limited economic data. Investors are eagerly awaiting Friday's release of the US Core PCE Price Index, the Fed's preferred inflation measure, to solidify expectations for a March rate cut.
If the Core PCE inflation data reveals a softer-than-expected scenario, it could strengthen expectations of a March rate cut, leading to a rise in the price of Gold at the expense of the US Dollar. Conversely, if US inflation comes in higher than anticipated, signaling persistent inflationary pressures, Gold prices may continue to recover. The Core PCE is anticipated to show an annual increase of 3.3% in November, compared to a 3.5% rise in October, while the Fed's inflation target is 2.0%.
Simultaneously, mid-tier US housing data and statements from Fed officials will play a crucial role in determining the value of the US Dollar, influencing Gold prices. Notably, Chicago Fed President Austan Goolsbee cautioned that the market may be overly optimistic about potential interest rate cuts, and Atlanta Fed President Raphael Bostic emphasized that there is currently no urgent need for the Fed to reduce US interest rates, given the robust state of the economy.
West Texas Intermediate (WTI) experienced a downturn, trading at around $74.00 per barrel in the Asian session on Wednesday, breaking a two-day winning streak. The decline can be attributed to increased geopolitical tensions caused by the Iran-led Houthi group's attacks on commercial vessels in the Red Sea.
In response to these attacks, the United States has formed a task force to protect Red Sea commerce. This decision follows virtual discussions between US Defense Secretary Lloyd Austin and regional defense ministers on Tuesday. Despite this, the Houthi group has vowed to defy the US-led naval mission and continue their attacks.
S&P Global Commodity Insights predicts a rise in US oil production, contributing to strong non-OPEC+ supply growth that may surpass the growing global demand in the coming year. This projection suggests a potential limitation on the upward movement of crude oil prices.
The American Petroleum Institute (API) reported a weekly increase in Crude Oil Stock to 0.939 million for the week ending December 15, reversing the previous decline of 2.349 million. The upcoming US Energy Information Administration's Crude Oil Stocks Change report, scheduled for Wednesday, is expected to show an improvement in stockpiles, with a forecasted decline to 2.233 million from the previous 4.259 million.
On Tuesday, Shell PLC and Equinor ASA announced the approval of a 90,000 barrels per day (bpd) oil and gas platform in the US Gulf of Mexico. They also expressed their commitment to making substantial investments in exploration to sustain production through 2050.
