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Dollar index up ahead of last Fed meeting in 2023, markets expect central bank to hold 

The Dow Jones Industrial Average (SJIA) achieved both an intraday high and a record closing on Wednesday following signals from the U.S. Federal Reserve (Fed) indicating a potential shift to interest rate cuts in 2024. 

The Dow rose by 512.30 points, or 1.4%, closing at 37,090.24, surpassing 37,000 intraday for the first time in history, according to Dow Jones Market Data. It reached as high as 37,094.85 during Wednesday's trading. 

The Federal Reserve maintained its key policy rate within the 5.25% to 5.5% range — a 22-year high —and projected three rate cuts in 2024 based on its revised dot-plot forecast. 

During an afternoon press conference, Fed Chair Jerome Powell said the Fed is "not likely" to hike further, adding that the central bank is "very focused on not making the mistake of keeping rates too high for too long.” Powell's comments drove all three major equity benchmarks up by at least 1.3% on Wednesday. 

The S&P 500 index ended the day with a 1.4% gain, while the Nasdaq Composite Index also finished 1.4% higher, marking their biggest daily increases in close to a month, as per Dow Jones Market Data. The S&P 500 and Nasdaq both hit fresh closing highs for the year. The S&P 500 is now up 22.6% for the year to date, while the Nasdaq is up 40.7% in that period and the Dow is up 11.9%. 

 

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Fed statement: Powell surprises markets with “remarkably dovish” message 

Prior to the Fed meeting on Wednesday, Markets.com Chief Market Analyst Neil Wilson wrote that the Fed was unlikely to appear overly dovish to avoid backing market assumptions of early interest rate cuts

“[...] signs are the Fed will not push back 100% against the market pricing right now. It doesn’t want to knock itself into a corner with an overly hawkish message now that needs to be rolled back in a couple of months’ time. It also doesn’t want to throw its lot in with the market’s assumptions for aggressive and early rate cuts next year and unleash the market dogs”. 

Powell’s speech seemed to have the opposite effect on stock markets. 

Tom Martin, senior portfolio manager at Globalt Investments in Atlanta, reacted to the meeting in a comment to the Reuters news agency: 

"The statement is telling us that the Fed is seeing what the markets have already started to discount, that you're going to have inflation back to normal without a recession. We kind of hoped it was going to be this, but we didn't really think it was”. 

Kathryn Rooney Vera, chief market strategist at StoneX Group, told MarketWatch that Jerome Powell sounded “remarkably dovish” in his press conference on Wednesday. The momentum appears to support a “Santa Claus rally” for stocks, according to her comments. The “Santa Claus rally” refers to the stock market’s tendency to push higher in the final five trading sessions of a calendar year and the first two sessions of the subsequent year. 

Despite the apparent optimism, Rooney Vera said concerns remain about whether the rally is sustainable in the next 12 to 18 months, as risks of a recession aren’t fully off the table. 

Interest rate cuts: Fed funds futures traders bet on easing in May 2024 

Wednesday’s rally is “all about the Fed,” Peter Cardillo, chief market economist at Spartan Capital Securities, told MarketWatch, pointing to the interest rate cuts now earmarked for 2024.  

“The question is when do the rate cuts begin? That is still the unknown. But what Powell said was sweet to the markets’ ears”. 

U.S. interest rate futures traders are now pricing in a 58% likelihood that the Fed will deliver its first interest rate cut in March 2024, according to the CME FedWatch tool. The odds of a rate cut in May have gone up to 90% as opposed to 80% just before the announcement, as per LSEG’s Fedwatch. 

Josh Jamner, investment strategy analyst at ClearBridge Investments, wrote in emailed comments to MarketWatch: 

“Powell was understandably hesitant to declare victory with regard to avoiding a recession. But the lack of pushback on easing financial conditions as inflation continues its trend lower should be enough to continue to support the Santa Claus rally for the time being”. 

The Fed’s dovish comments saw the DXY dollar index drop to 102.89, down 0.83% on the day — its lowest level since November 30.  

When considering shares and indices for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.  

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. 

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