• Dollar pulls back on Thanksgiving as Fed cut bets weigh

• Focus today turns to the preliminary S&P Global PMIs

• Japan’s CPIs accelerate, corroborating a BoJ policy exit next year

• Gold gains, oil loses more ground on OPEC delay

The US dollar turned south again yesterday and continues to underperform against some of its major peers today. Without any important release or news to drive the greenback as US markets remained closed for Thanksgiving, expectations of several rate cuts by the Fed next year came back to haunt the currency, keeping the dollar index (DXY) on course for its weakest monthly performance in a year.

Today, although Wall Street is scheduled to close early, some dollar traders may stay on their desks as the preliminary US S&P Global PMIs for November are due to be released. The manufacturing index is forecast to show that the sector contracted again after stagnating in October, while the services index is anticipated to point to a slowdown. Such numbers may add more credence to investors’ belief that the Fed is likely to cut rates sharply next year, and thereby keep the US currency under pressure.

Indeed, the Atlanta Fed GDPNow model estimates a slowdown to 2.1% in Q4, but with interest rates at such high levels and the economy expanding 4.9% in Q3, this appears quite normal and by no means justifies almost 100bps worth of rate reductions within 2024 that the market expects. Bearing that in mind, and the Fed’s ‘higher for longer’ mentality, there may be ample room for upside adjustment in the market’s implied rate path should upcoming data suggest that the economy is faring better than expected or inflation proves stickier than anticipated. Therefore, it may be too early to start arguing about a bearish reversal in the US dollar.

The yen traded virtually unchanged against its US counterpart yesterday, and continues to be trading flat today, as Japan’s National CPI data during the Asian session today revealed that both the headline and core inflation rates rose in October, but by less than expected.

That said, inflation still accelerated which increases the likelihood for businesses and labor unions to agree on another round of strong pay hikes next year, thereby allowing the BoJ to eventually exit ultra-loose policy conditions sooner than previously anticipated.  Speculation on that front could keep the yen supported and if the BoJ indeed decides to abandon its YCC policy and/or raise interest rates at a time when other central banks start to consider interest rate reductions, the currency may be poised to decisively reverse course against most of its major counterparts.

With the US dollar pulling back and US Treasury yields staying under pressure, gold rebounded yesterday but remained below the round number of $2,000. Although the Middle East risk premium seems to have faded, expectations that the Fed will cut rates sharply in 2024 are making gold attractive.

In the energy sphere, oil prices lost some more ground yesterday due to OPEC’s announcement on Wednesday to postpone Sunday’s meeting. This was due to expectations that the cartel and its allies might not deepen output cuts next year, with a source saying that producers are struggling to agree on quotas. Today, black gold is recovering some ground as the latest tumble may be seen as an overreaction to the news.

European stock markets ended Thursday’s session in positive territory as the Eurozone and UK preliminary PMIs for November came in better than expected. Although the Euro-area PMIs remained below 50, they suggested that a recession may be shallower than expected, while in the UK, the composite index returned above 50 for the first time since July.

Combined with UK finance minister Jeremy Hunt’s announcement of measures to support the wounded economy, including larger-than-expected tax cuts for workers, as well as the hawkish rhetoric by BoE’s Governor Bailey, improving UK data may keep the pound supported for a while longer as investors scale back their BoE rate cut bets.