Despite a bit of a setback over the past few weeks, markets are arguably still sticking with their guns as we look towards next year. It is very much a case of nobody wants to buy what the Fed is selling – at least in terms of pricing and rates.
That doesn’t bode well for the dollar outlook, considering what the markets believe will ultimately result in rate cuts some time late in 2023 – which would be a massive tailwind for heavy dollar selling. But are things really going to be that straightforward? More often than not, they never are.
What markets are perceiving now is that a somewhat ‘soft landing’ will be achieved, or at least hopes for such an outcome are not dashed just yet. Adding to that is the view that inflation has peaked somewhat and we are going to see price pressures slow down much further next year. That means the Fed is wrong about their projections and that eventually, there will be reason to reverse course on interest rates.
Sounds simple enough, doesn’t it?
Except that there are so many moving parts to that equation, with the most damning one perhaps being that we are angling towards a sort of inflation plateau and not an inflation peak.
If the Fed’s resolve is strong enough to win out against market expectations, that could arguably be reason enough to not expect the dollar to suffer too heavily – all else being equal. But don’t take my word for it. There’s two sides to every story.