Market analysis

3 scenarios for USD based on 2024 rate cut reactions

By Paul Reid

04 January 2024

Fed rate cuts

In this article, we will cover Exness opinions alongside reporting from Barron’s, which is a commercial partner of Exness.

As 2024 unfolds, traders around the globe are closely monitoring the United States Federal Reserve's monetary policy, particularly the possibility of rate cuts throughout the year. The implications for the US dollar, US stocks, and indices could be significant, and there are three possible scenarios to watch out for.

Scenario 1: Gradual rate cuts

If the Fed opts for a series of gradual rate cuts in 2024, we could see a phased depreciation of the US dollar. Lower interest rates typically diminish a currency's appeal as global investors seek higher yields elsewhere. This scenario might favor emerging market currencies and possibly strengthen the euro and yen. 

As for US stocks, a softer dollar often spells good news for large US multinationals. Competitive export pricing due to a weaker dollar could boost overseas sales, positively impacting earnings reports. Companies with significant international exposure might outperform, offering lucrative opportunities for stock traders.

Scenario 2: Aggressive rate cuts

Should the Fed aggressively slash rates, inflation fears could overshadow the initial euphoria in equity markets. Rapid rate cuts might increase consumer spending, potentially overheating the economy.

A short-term surge in US stocks and indices is likely in this environment as investors move away from bonds and savings. However, traders should be wary of the potential for asset bubbles and a subsequent correction.

Scenario 3: Hesitation or no rate cuts

Contrary to expectations, the dollar could strengthen if the Fed is hesitant or refrains from cutting rates. That might result from a combination of higher yields attracting foreign investment and a perception of economic stability in the US.

A strong dollar could be a double-edged sword for US stocks. While it might benefit specific sectors like domestic-focused small caps, larger multinationals could suffer due to less competitive export pricing. This divergence could increase market volatility, demanding strategic agility from traders.

Conclusion

While each scenario presents unique challenges and opportunities, the overarching theme for traders is clear: stay informed, remain agile, and diversify. In doing so, one can navigate potential turbulence and capitalize on opportunities in the currency and stock markets this year.

It’s also recommended that you pay close attention to market sentiment, which can often deviate from traditional behaviors and expectations. Stay current on fundamental releases, but also pay close attention to the general mood of the market. 

Barron’s recently made some fascinating observations that every trader should be aware of. The full article is below.


The Market May Be Too Optimistic. This Trade Can Help You.

BY STEVEN M. SEARS | UPDATED JAN 03, 2024 01:30 AM EST

Every new year begins with pure intentions. Most everyone vows to be a better version of themselves and to live a healthier life of action and consequence. Unfortunately, the stock and options markets are immune from the feel-good bromides that people like to tell themselves.

The risks that plagued markets last year have carried into 2024, with at least one critical caveat that now seems poised to define the new year—provided the regional wars in the Middle East and Europe don’t bring global powers into direct conflict.

The caveat? The Federal Reserve, which raised rates so aggressively last year, is widely expected to start lowering rates this year.

All Barron’s readers know that, as do even those who have little interest in financial markets. After all, the world has experienced unusually gentle financial conditions for almost 25 years. Generations of people have been conditioned to think that low interest rates are their birthright.

Decades of rising stocks have overpopulated the world with financial geniuses—even in some unlikely places. A friend recently shared that staff, and residents, of a homeless shelter in the Northeast are all excitedly talking about day-trading stocks and cryptocurrencies.

Some will view their enthusiasm as an indication that they want to improve their lot in life. Others will view it as a warning that may prove as emblematic as the apocryphal 1920s shoeshine boy who liked to pass out stock tips to his customers.

Anyone who wants to avoid homelessness must maintain what can best be described as skeptical bullishness. Markets rise over time, though not in a straight line, while strong returns rarely accrue to people who fail to question passing trends.

A key question for 2024 thus concerns the federal-funds futures curve, which is renowned for accurately predicting the future of interest rates. As of now, it tells us that rate cuts are expected in 2024. But we find ourselves wondering if the investors who influence the curve have become less logical and more like the market mob. If investor narcissism has polluted normally clinical areas of the market, could the curve’s prediction of rate cuts be distorted?

We recognize that it is near heretical for an equity-oriented investor to question the bond market. But it is hard to understand why data-dependent Fed governors would so quickly declare victory over inflation without ensuring that the economy’s strength isn’t transitory. Hence, pending meetings to discuss rates might be more significant for the stock market’s trajectory, and options volatility levels, than presently anticipated.

The Fed’s rate-setting committee concludes its first meeting of the year on Jan. 31 and its second meeting on March 20.

Investors who want to buy blue-chip stocks at lower prices—and profit from any gains—can consider a so-called risk-reversal trade on the SPDR S&P 500 exchange-traded fund, which entails selling a put option and buying a call option with a higher strike price but a similar expiration date. The strategy monetizes investor fear, subtle or pronounced, which is captured in the put premium, but still profits if the ETF gains.

With the SPDR S&P 500 ETF at $472.65, investors can sell the April $460 put for about $7.67 and buy the April $485 call for about $9.15.

If the ETF is at $500 at expiration, the call is worth $15. The strategy’s primary risk is that the ETF falls far below the put strike price. In that event, investors are obligated to buy it at the put strike price or to adjust the position to avoid assignment.

The approach is designed to put a leash on the animal spirits that continue to define the markets after 2023’s extraordinary stock rally.


Trade market volatility with the Exness Stop Out Protection feature and reduce the risk of stop out by as much as 30%.


This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Author:

Paul Reid
Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.