US Dollar Falls, Stocks Hit Long-Term Highs

The US Dollar is continuing to trade lower, and US stocks notably higher, on the increasing market consensus that the Fed is done hiking rates and will begin rate cuts next year.

1. Market sentiment continues to be dominated by the fallout from the lower-than-expected US and UK inflation data last week which suggests that the Federal Reserve will likely make no further rate hikes, and having reached a terminal rate at 5.50%, will cut its interest rate by 0.50% by July 2024. This sentiment is lifting many riskier assets and is sending the US Dollar lower.
2. Some major US stock market indices reached new multi-month high prices yesterday. The benchmark S&P 500 Index traded at a 3-month high while the NASDAQ 100 Index reached a new 20-month high price. Such strong momentum in US stock markets will attract day and trend traders on the long side, and historically represents a good statistical chance to profit.
3. The Japanese Finance Minister yesterday tweeted that bright signs are beginning to emerge in the Japanese economy, with wage growth finally becoming established, which could leave the door open for the Bank of Japan to finally abandon its ultra-dovish monetary policy in 2024. This has helped trigger continuing gains by the Japanese Yen, which has been the strongest major currency in the Forex market since today’s Tokyo open, while the Canadian Dollar has been the weakest. Almost every major currency is higher against the US Dollar, with the EUR/USD currency pair reaching a new 3-month high and the GBP/USD reaching a new 2-month high. However, many trend followers will not be ready to enter new long trade in these currency pairs as their short-term moving averages remain below their longer-term moving averages, which is often a key trade filter in trend following strategies.
4. The Reserve Bank of Australia released the minutes of its most recent policy meeting which revealed major concern about demand-driven inflation. This may have helped boost the Aussie on the prospect of more rate hikes, but the Aussie was probably going to perform well in the current risk-on environment anyway.
5. There will be releases later today of Canadian CPI (inflation) and the US FOMC Meeting Minutes.