Lower interest rates may be on the way

Following the clear remarks from the US Central Bank officials on the rate hikes to be over, the North American stock markets initiated a one-month rally and US dollar started to weaken out. S&P 500 and Nasdaq added 4.68% and 4.92% and Canada’s S&P/TSX advanced 2.96% in one month.

Since the start of the rate hike campaign in 2022, the US Federal Reserve continues to keep the markets on edge with consecutive interest rates increases forming the market expectation that there are no rate cuts at least until the end of 2024. The move was successful to control the inflation so far and led to numerous economic indicators showing slowdown and possibility of recession.

The high interest rate provided a lot of interest for the US dollar, making the strongest FX for over a year against all other major peers. The US and Canadian central banks finally move to show softer tone and signalled the end of rate hikes and markets have started to price in 1.25% or 5 rate decreases in 2024.

The euphoria led to stocks skyrocketing and US dollar losing its strength but now stocks are at the overbought area and might need to take a break. It looks like the markets became too optimistic and is aiming for an outcome much better than the one Fed is willing to offer.

The US job report on Friday is key to show if market expectations are reasonable.