January 2, 2024
Forex Daily Analysis 2 January 2024
Economic data: S&P Global US Services PMI, December, final (48.4 expected, 48.2previously); MBA Mortgage Applications, week ending December 29
CURRENCIES:
- U.S. Dollar’s Downward Correction
- Witnessed a significant downward correction in the U.S. dollar due to expectations of the Federal Reserve reducing borrowing costs.
- US Treasury yields plunged in the last quarter of 2023, contributing to the dollar’s lowest level in five months.
- Currency and Precious Metal Performance
- EUR/USD and GBP/USD experienced a notable surge, reaching multi-month highs in late December.
- Gold prices showed strength, concluding 2023 above $2,000, though slightly below its all-time high.
- The bullish trend in gold is expected to continue, benefiting from the Federal Reserve’s policy shift.
- Equity Market Rally
- The pullback in U.S. bond yields triggered a substantial rally in the equity market.
- Major stock market indexes reached new records, reflecting the prevailing risk-on sentiment.
- Outlook for Q1 2024
- U.S. dollar may continue to face losses in the coming months due to downward-sloping yields.
- Anticipated upward momentum for gold, EUR/USD, GBP/USD, and stocks in Q1.
- Caution advised as some markets approach potential overbought conditions.
- Increased Volatility and Trading Setups
- Expect different market dynamics leading to heightened volatility.
- Opportunities for enticing trading setups in major assets, including currencies, commodities (gold, silver, oil), and cryptocurrencies.
STOCK MARKET:
- Fed Rate Cut Speculation:
- Morgan Stanley’s Ellen Zentner suggests a possible Fed rate cut may come later than market expectations.
- Zentner emphasizes that monthly payroll additions below 50,000, coupled with consistent low inflation, could trigger a March rate cut.
- Caution is advised, highlighting that a single weak jobs report might not be sufficient for a rate cut decision.
- Morgan Stanley’s Base Case:
- The base case for Morgan Stanley remains a Fed cut in May, contrary to earlier market expectations.
- Late 2023 Market Rally Impact:
- Investors face the question of whether the late 2023 market rally accelerated the gains expected in 2024 or if there is room for further upward movement.
- Ryan Detrick, Chief Markets Strategist at Carson Group, cites historical data indicating that after a late-year S&P 500 rally exceeding 10%, the benchmark average historically rose by an average of 19.5% in the following year.
- Contrasting Views on Market Continuation:
- Tom Lee, Fundstrat’s Head of Research, acknowledges the likelihood of new all-time highs for the S&P 500 but anticipates a subsequent consolidation.
- Lee points out key concerns, including investor uncertainty about the Fed’s rate-cut timing and a potential downturn around February or March in an election year.
- Tom Lee’s Market Outlook:
- Lee predicts a brief pullback after new all-time highs, suggesting a range of S&P 500 at 4,400-4,500.
- Consistent with the 2024 Year Ahead Outlook, Lee’s base case envisions most gains for the S&P 500 in the second half of 2024.
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