USD Collapses, Stocks Hit Highs

The US dollar continues to fall, while US stocks are rising significantly on the growing market consensus that the Fed has decided to raise rates, starting to cut them next year.

1. Market sentiment continues to be dominated by the fallout from last week’s lower-than-expected US and UK inflation data, which suggests the Federal Reserve is unlikely to make further rate hikes and, having reached a terminal rate at 5.50%, will cut its interest rates by 0.50% by July 2024. This sentiment is lifting many riskier assets and driving the US dollar lower.
2. Some of the major U.S. stock market indexes hit new multi-year high prices yesterday. The benchmark S&P 500 index traded at a 3-month high, while the NASDAQ 100 index hit a new 20-month high price. Such strong momentum in the US stock markets will attract day and trend traders to the long side and historically represents a good statistical chance for profit.
3. Yesterday the Japanese Finance Minister tweeted that positive signs are starting to emerge in the Japanese economy, with wage growth finally consolidating, which could leave the door open for the Bank of Japan to finally abandon its ultra-accommodative monetary policy in 2024. This outlook has helped trigger continued gains by the Japanese Yen, which has been the strongest major currency in the Forex market since Tokyo opened today, while the Canadian Dollar has been the weakest. Nearly all major currencies are trading higher against the US dollar, with the EUR/USD currency pair hitting a new 3-month high and the GBP/USD pair hitting a new 2-month high. However, many trend followers will not be ready to take new long-term trades in these currency pairs as their short-term moving averages remain below their long-term moving averages, which is often a key trading filter in strategies who follow the trend.
4. The Reserve Bank of Australia has released minutes from its latest policy meeting which revealed strong concerns about demand-led inflation. This may have helped stimulate the Aussie for further rate hikes, but the Aussie currency would still likely have performed well in the current risk-on environment.
5. The Canadian Consumer Price Index (inflation) and US FOMC meeting minutes will be released later today.