Reality vs. Expectations Will Drive Markets
Looking ahead to 2024, the focus is likely to remain on interest rates. In this regard, with the exception of Japan, it is not if but when and how much rates will be cut that will drive price trends. In this regard, expectations will be the driver.
Heading into the New Year, markets have priced in significantly more interest rate cuts this year than are currently indicated by central banks. For example, the latest FOMC meeting indicated rate cuts of 75bp this year vs. market pricing of 150 bps.
What does this suggest for trading?
What this suggests is that expectations of future rate cuts will continue to drive global markets. It also means that there will be volatility around economic reports, not just top but second and third tier data releases. This will offer opportunities to trade but only see sustained reactions if it alters market pricing of future interest rate cuts.
It also suggests a focus on central bank speakers and monetary policy meetings. Up to this point, markets have reacted more to dovish talk than hawkish comments. So, watch the reaction to central bank speak for hints of market sentiment.
In addition, keep an eye out for relative economic performance and inflation data of major industrialized countries as that will affect cross-currency rates, especially if there is divergence in the data between economies. .
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