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Central banks will continue to dominate the market landscape in 2024

The long-awaited pivot by the Fed finally came in the final FOMC meeting for the year. And that sets up the stage for other major central banks to also follow suit starting next year, unless you’re the Bank of Japan of course. 2023 has been a year dominated by the outlook for major central banks and 2024 will be no different in that regard.

The only thing now is that we’re no longer talking about rate hikes but rate cuts instead. Traders have over the last two months, moved to aggressively price in rate cuts for most major central banks and that sets the backdrop heading into the new year.

It will be a push and pull between the current market pricing and any central bank pushback in the months ahead. All that before the likelihood of central banks conforming to market expectations and then slowly guiding rates back lower, as the disinflation process looks to gather pace in the year ahead.

Given such a predicament, the bond markets i.e. rates will continue to be a pivotal spot to watch – just as it had been this year. The real debate now in Q1 2024, is whether or not traders have it right to price in rate cuts as early as March to May for the likes of the Fed, ECB, and BOE in particular.

And if not, will that stem from a pushback from policymakers or more stubborn inflation data? And how much of a reversal or squeeze will we see to the recent sell the dollar, buy everything else move in markets?

On the flip side, if central banks start agreeing to traders’ pricing, is there room for a further extension to the recent moves? Plenty of questions but only time will tell.

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