The typical Santa Claus rally appeared to kick off on Monday, December 11th, as the Nasdaq 100 (NAS100) broke free from a 24-day trading range. However, as the week started, traders braced for potential turbulence at yesterday's Fed rate meeting. Contrary to expectations, the Federal Reserve's decision has set the stage for further gains and a possible surge in the Nasdaq 100 (NAS100) and EUR/USD in the coming weeks and beyond.
The Federal Reserve's Rate Meeting: A Shift in Stance
During yesterday’s Fed rate meeting, the central bank opted to maintain interest rates at their current levels, aligning with consensus forecasts. What came as a surprise was the unexpected shift in the Fed's stance on the future. Previously, they had adopted a hawkish tone, emphasising the need to keep rates high for an extended period. Yet, at this meeting, they pivoted towards a dovish stance.
Lower Rate and Inflation Projections
The central bank not only published a lower interest rate and inflation path for the next year but also adjusted the wording in their statement to be more dovish in nature. This move has led the market to interpret it as the Federal Reserve's first clear signal of its intention to reduce interest rates. The prevailing assumption is that the initial rate cut will occur in March 2024.
A closer examination of the Federal Reserve's 2024 outlook reveals a downward revision of 50 basis points, indicating three expected 25 basis point rate cuts over the next year. However, it's worth noting that these projections remain slightly lower than what the market is anticipating.
Additionally, the Fed's preferred inflation gauge, Core PCE, was adjusted downward from an annual high of 2.6% to 2.4%.
Of particular interest is the Fed's explicit mention of slowing growth and cooling inflation in their statement. This signals a departure from their previous commitment to maintaining higher interest rates for an extended period. Even within the individual forecasts of the Federal Open Market Committee (FOMC) members, there is a noticeable narrowing of the range, suggesting a growing consensus in favour of lower interest rates.
Market Response and Perspective
From a market perspective, reducing interest rates makes various financial assets more affordable. We have already observed mortgage rates decreasing worldwide, providing relief to homeowners and potential renters as housing expenses become less burdensome. However, the critical question for the financial markets is whether this trend will endure and whether the Federal Reserve can orchestrate an economic slowdown without pushing the economy into a recession.
A look at recent non-farm payroll numbers and the unemployment rate reveals that unemployment remains at multi-year lows, with the November rate at 3.7%, not significantly different from December last year's rate of 3.5%. Historically, the U.S. economy tends to enter a recession when the first-rate cut occurs, as is likely in March 2024. This delay between interest rate adjustments and their economic impact is critical.
Additionally, data from the ISM manufacturing Purchasing Managers' Index (PMI) has dropped in the last two months, from staging a sharp bounce from summer 2023, indicating ongoing challenges in the manufacturing sector. Given these factors, market participants are cautiously optimistic about the Federal Reserve's dovish stance and are hopeful that the European Central Bank (ECB) will follow suit in their upcoming rate meeting this week.
Considering the seasonal patterns that suggest stock indices and risky assets tend to perform well at this time of the year and early next year, it is anticipated that stock markets will exhibit upward momentum in the coming weeks, with a potential slowdown in the last week of the year, and the first week of 2024.
However, as we approach the end of January 2024, market attention will shift again to economic data.
The critical question remains: Is the Federal Reserve making the right move by waiting to lower interest rates, and can they successfully navigate the economic landscape without triggering a severe recession?
Technical Insights: EUR/USD and NASDAQ 100
From a technical point of view, the EUR/USD currency pair finds itself trapped in a bullish wedge pattern. One trendline extends through the 2023 high and the November 27th high of 1.1017, while the supporting trendline within this wedge pattern passes through the February lows and the October lows.
This pattern suggests that if EUR/USD can break above the trendline and the November 27th low, it might attempt to reclaim its 2023 high of 1.1278, potentially setting its sights on the wedge pattern target of 1.1646 in the coming year.
However, EUR/USD's outlook is not without challenges, as the European Central Bank (ECB) is also expected to cut rate in 2024, adding a layer of uncertainty to the currency pair's trajectory.
EURUSD daily chart
As for the NASDAQ 100, the technical trend appears clear. The price has been confined within a large cup and handle pattern that has been forming since September 2020, reaching its culmination in recent weeks. This pattern implies the potential for the index to surge as high as $21,434 over the next 1-2 years. The price will remain bullish in the short term, with support around $15,680. Some traders might even seek opportunities to buy on dips toward the November 29th high of $16,191.
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