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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Market Analysis]: Interest rate cuts suppress the weakening of the U.S. dollar, why are U.S. bond yields strong?". Hope this helps you! The original content is as follows:
Last Friday, the U.S. core PEC annual rate unexpectedly dropped to 2.8% in September, hitting a three-month low. As of now, the U.S. dollar index is quoted at 98.89.
The annual rate of the U.S. core PCE price index unexpectedly fell to 2.8% in September, a three-month low. The market expected it to record 2.9% for the third consecutive month.
U.S. University of Michigan survey: Consumer confidence ended four consecutive months of decline, and short-term inflation expectations fell to the lowest level at the beginning of the year.
White House Economic Council Director Hassett: It’s time for the Federal Reserve to cut interest rates prudently.
The issue of the choice of Fed chairman has not been discussed with Trump.
Bessent exits his $25 million soybean business.
Bessent: The United States will achieve 3% GDP growth by the end of this year.
Trump: Approved to produce small cars in the United States.
Trump talks about the Supreme Court tariff case: The United States has other ways to impose tariffs, and the current method is much more direct.
Hamas said it is willing to discuss the issue of disarmament within the framework of promoting Palestinian statehood.
US media: Energy for peace, the United States promotes Israel to reconnect with the Arab world.
Russian media: Russia’s gold reserves exceeded US$300 billion for the first time in November, setting a modern historical record.
Central Government of ChinaLine: China's gold reserves at the end of November were at 74.12 million ounces, an increase of 30,000 ounces from the previous month, marking the 13th consecutive month of increasing gold holdings.
Mitsubishi UFJ: The Bank of Japan will raise interest rates three times before the end of next year
The weakening of the U.S. dollar and the fall in U.S. bond yields pushed the U.S. dollar briefly back below 155 against the yen. Japanese policymakers hope that rising market expectations for a rate cut by the Federal Reserve and expectations that the Bank of Japan may restart interest rate hikes this month can provide more support for the yen and end the sharp weakness in the yen that has continued since early October.
Market expectations for the Bank of Japan to raise interest rates this month have increased significantly after Kazuo Ueda released a hawkish signal. A Reuters report last night further fueled this expectation: the Bank of Japan is likely to raise interest rates this month and the government is expected to tolerate such a decision, three government officials familiar with the matter said. One of the government sources said, "If the Bank of Japan wants to raise interest rates this month, then let it decide on its own. That is the government's position." This cn.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.orgment reinforces our view that the Bank of Japan has received the "green light" from the government and the government will not block its move to increase interest rates.
Ueda Kazuo still emphasized in his previous speech that the current policy interest rate is still at a loose level. However, he was not clear about the location of Japan's neutral interest rate. He said: "Unfortunately, the neutral interest rate can still only be estimated within a wide range. We do not know exactly where it is, but where the nominal interest rate will eventually rise and which level is appropriate depends on this neutral interest rate." The Bank of Japan previously estimated that the nominal neutral policy rate may be between 1.00% and 2.50%, which means that there is still room for further interest rate increases in the next few years. We currently expect the Bank of Japan to raise interest rates three more times by the end of next year, taking the policy rate to 1.25%.
Mitsubishi UFJ: The U.S. job market will remain weak at the end of the year, supporting expectations for interest rate cuts
The U.S. dollar remained at a weak level overnight, falling back below 99, the first time it fell below this level since the end of October. The G10 currencies with high beta coefficients that have benefited most from the recent pullback of the US dollar include the pound sterling, the Norwegian krone, the Australian dollar and the New Zealand dollar. In the UK, the pound continued to recover its previous losses. Last week's British budget did not have a negative impact on the British government bond market, which weakened the market's previously priced fiscal and political risk premium on sterling, allowing short positions in sterling to be covered. The sharp decline in implied volatility also reflects that investors' concerns about sharp selling have significantly eased after the budget was implemented. The final value of the British services PMI released on Wednesday showed that business confidence has improved, and the decline in confidence is smaller than the initial value.
A broader sell-off in the U.S. dollar has pushed GBP/USD back above the 200-day moving average around 1.3325, with the core driver of U.S. dollar weakness cn.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.orging from lower U.S. yields. Weak U.S. economic data released on Wednesday reinforced market expectations for the Federal Reserve to cut interest rates this month. Latest ADP data shows U.S. private sector employment fell by 32,000 in November, while there was an increase of 47,000 in October. This supports our previous view: US labor demand remains weak at the end of the year. Since November's non-farm payroll data is delayed until after the December Fed meeting, cn.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.orgmittee members have to rely more on other indicators of the labor market to determine whether to cut interest rates this month.
Rabobank: The new chairman of the Federal Reserve will demonstrate its determination to cut interest rates, and interest rates may be lower than the neutral level
The tariff policy implemented by the Trump administration has had a stagflationary impact on the economy. So far, the rise in core cn.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.orgmodity inflation has been offset by the continued decline in housing inflation, causing core inflation to generally fluctuate sideways rather than falling back toward the Fed's target. A large amount of tariff-related inflation is still being transmitted. This may continue to push up CPI in the first half of 2026, so we do not expect core CPI to see a more significant decline until the second half of 2026. Sino-U.S. relations could be a risk factor for a renewed rise in tariffs, while the midterm elections could be a factor for a fall in tariffs, as the affordability of goods could become a key election issue.
The Fed is still concerned about the stagflationary impact of tariffs, and there are clear differences within the cn.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.orgmittee. Hawks are concerned about limited progress in inflation, while doves are concerned about downside risks to the labor market. The lagged impact of tariffs on inflation could slow the pace of rate cuts, especially in the first half of next year. Once the new Fed chairman is in place at the June resolution, we may see a firm determination to push interest rates back to neutral or even below neutral levels, with the goal of cn.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.orgpleting this process by the end of 2026.
Our baseline forecast does not include the risk of recession in 2026, and the risk of recession due to austerity has receded. Recession risks from the stagflationary shock caused by tariffs have eased, but could rise again if Sino-U.S. relations deteriorate again. Moreover, the bursting of the AI bubble may lead to a decline in corporate investment and reverse the wealth effect, thereby weakening consumer spending. In addition, other asset bubbles cannot be ruled out. Therefore, the risk of recession next year cn.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.org.xmtrade.orges more from trade policy and asset bubbles than from monetary and fiscal policy. However, the timing and probability of escalating trade conflicts and bursting of bubbles are extremely difficult to predict, so we do not include them in our baseline forecasts, but clearly indicate the risk exposure. If the risks materialize, the Fed will have to cut rates significantly below neutral.
ANZ: Changes in the FOMC dot plot are limited, and data dependence will be the core of policy adjustments in 2026
Given that the FOMC last updated its forecast data in September, and high-level economic data has been extremely scarce since then (the government shutdown disrupted the normal data release schedule), it is expected that the revision of the macro forecast at this meeting will not be too large.
While Atlanta Fed GDPNow estimates for the third quarter have been rising, the ISM Manufacturing and Services PMIs suggest little change in economic momentum. The ISM employment index has slipped below 50.0, which strongly suggests that private demand may slow slightly in the fourth quarter and income growth may have slowed down during the quarter.Cool down.
Although the government shutdown caused a drag on growth of about 1.5 percentage points (annualized rate) in the fourth quarter of 2025, this part of the loss will be made up in the next few quarters and will not have a structural impact on the medium-term growth forecast.
In terms of inflation, the Federal Reserve's Beige Book showed that inflationary pressures were almost unchanged from previous reports. The ISM survey showed that price pressures have eased in both goods and services - consistent with the conclusion that the impact of tariffs on inflation is temporary. Long-term inflation expectations have been well anchored, with the 5-year-5-year forward inflation swap rate stable within a range of 2.40%-2.50%; the University of Michigan's 5-10-year inflation expectations fell 0.5 percentage points to 3.4% in November, the lowest level since January. Wage growth is declining moderately, with average hourly wages growing at a year-on-year rate of 3.8% in September, consistent with the path back to target inflation.
Moderating wage growth will further drive the decline in super-core inflation. Background conditions for housing inflation are improving, with both house price growth and new rental agreement prices declining.
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