From the point of view of central banks, in view of high inflation and very low unemployment, the focus is now exclusively on inflation targeting. Commerzbank economists discuss how the Fed rate cut will affect the bond and currency markets.
The 10-year US Treasury yield will rise to 4% in the first quarter
“If price pressures ease, the Fed should see room in late 2023 to cut, at least to some extent, high policy rates. However, if the recession doesn’t materialize, there probably won’t be any easing.”
“In the bond market, the ongoing improvement in the US economy suggests that the market will question the rate cuts planned for this year in the coming months. Therefore, we expect the 10-year US Treasury yield to rise to 4%. in Q1.With clearer signs of a recession, the continuation of the sharp decline in inflation rates, and the Fed rate cuts we expect, we then see potential for a decline to 3% by the end of the year. “
“If Fed rate cuts become more likely, the dollar is likely to come under pressure again in the currency market. However, too much further dollar weakness can no longer be expected as the market has already taken into account account the Fed’s rate cuts.”
Source: Fx Street
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