USD Roller Coaster, GBP Policy Puzzle & Euro’s Year End Resurgence.

USD: The U.S. dollar, tracked by the DXY index, kicked off the fourth quarter strongly, reaching its highest position in nearly a year. Fueled by rising U.S. Treasury yields and bets on a prolonged restrictive stance by the Federal Reserve, the greenback’s ascent was short-lived. A sharp correction in yields, triggered by mild inflation readings, prompted markets to anticipate aggressive rate cuts, pushing the U.S. central bank to eventually pivot in December. As yields retracted, the U.S. dollar index tumbled, hitting its lowest point since August.

GBP: In the Q4 British Pound forecast, doubts surfaced about whether the Bank of England (BoE) had concluded interest rate hikes. The answer came swiftly as expectations for future rate cuts are now fully priced into the market. The focus shifts to how long the BoE will resist market expectations before easing monetary policy. With central banks globally managing rate cut expectations, the divergence between the BoE’s and the market’s outlook on interest rates will steer the British Pound’s trajectory in the coming quarter, offering traders opportunities amid central bank talk.

EUR: EUR/USD is poised to end 2023 positively, recovering from a second-half decline. Despite a positive medium-term trend, yield differentials struggle to sustain prolonged upside potential. The disparity between German 10-year bund and U.S. Treasury yields, though maintaining an overall upward move, could limit EUR/USD upside in Q1 2024. Despite trading lower at the start of 2024, EUR/USD registered gains in December, with the USD facing weakened demand and anticipation of a Federal Reserve rate cut. The European Central Bank (ECB) emphasized it was premature to consider a policy pivot, adding an element of uncertainty. As the new year unfolds, macroeconomic data releases will likely influence investor sentiments.