Financial Conditions

Financial conditions are quite favorable, and the economy is expected to grow faster next year. The US Dollar has fluctuated against major currencies, performing best against the New Zealand Dollar. Recent data shows that the US Dollar changed by -0.41% against the New Zealand Dollar, with other currency variations also noted. The heat map displays these percentage changes based on selected base and quote currencies. We expect inflation to stay high for another two to three years, so we should doubt the market’s current predictions of Federal Reserve rate cuts. Recent weak job data has led to short-term expectations for easing, but this is likely just a reaction to a longer trend. The Fed’s position suggests that monetary policy will remain tight, creating a gap between what the market thinks and what the central bank plans. This indicates that interest rates may stay higher for a longer period than the market expects. Fed Funds futures suggest at least two rate cuts by the end of 2026, which seems overly optimistic given the forecast for ongoing inflation. A similar situation occurred in 2023, when traders anticipated a Fed shift, but rates stayed high.

Currency Opportunities

For currency traders, the recent drop in the US Dollar, especially against the Euro and Pound, might be a good buying opportunity. A tight Fed, especially while other central banks are easing, supports a stronger dollar in the medium term. The current USD strength against the Australian and New Zealand dollars reflects this difference, a trend likely to continue. The disagreement between the Fed’s outlook and market reactions may lead to more volatility in the upcoming weeks. The CBOE Volatility Index (VIX), recently below 15, seems to underestimate the risk of a hawkish surprise from the Fed at its next meeting. Strategies that benefit from price fluctuations, like long straddles on major indices or currency pairs, could prove helpful. With inflation likely to exceed targets for years, it’s crucial to hold assets that serve as an inflation hedge. Gold pricing near $4,000 an ounce, despite high interest rates, shows serious concern about decreasing purchasing power. Historically, during the high-inflation years from 1971 to 1981, gold delivered average annual returns of over 30%, proving its value as a store of wealth in such times. Create your live VT Markets account and start trading now.

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