The Federal Reserve has implemented its anticipated 25 basis point interest rate cut and, as expected, has tempered its future easing strategy to two additional cuts in 2025. However, market responses indicate that this adjustment was not fully priced in. Nasdaq futures faced their most significant decline in five months, while the S&P 500 and Dow Jones experienced their worst performance in four months. All three indices finished the day near their lows, reflecting a pronounced bearish trend with high negative delta volumes, suggesting that sellers were significantly outnumbering buyers.
If a 'Santa rally' is to take place this year, it may only be a modest recovery from the sharp selloff witnessed yesterday. Historically, Wall Street indices have trended upwards as the year-end approaches, often with other global markets following suit. The accompanying chart illustrates that gains have typically begun around December 21st for the S&P 500, characterized by a series of positive average returns and a favorable win rate. Nevertheless, I remain skeptical about whether the potential returns during this period will compensate for the losses recently incurred, suggesting that this year's Santa rally might be more of a tepid bounce rather than a robust surge.
During the press conference, Jerome Powell pointed out that stronger economic growth and decreasing unemployment rates have influenced the Fed's decision to ease more cautiously. He emphasized the need for continued progress on inflation to justify any further rate cuts. Powell adopted a prudent stance, opting not to comment on former President Trump's policies.
AUD/USD Technical Analysis
The simultaneous rise of the US dollar and continued fallout in Wall Street markets resulted in AUD/USD plunging to a two-year low, marking its worst performance since March 2023. The Australian dollar is now hovering just over 50 pips away from its 2022 low, a threshold that seems almost obligatory to test.
That 2022 low represents a significant level; a touch could incite a volatile shakeout as bearish traders might consider booking profits. However, the aggressive bearish movement at cycle lows highlights an underlying panic in the market. Coupled with the weakening Chinese yuan and declining Chinese bond yields, this is not a bearish trend I would choose to challenge head-on. AUD/USD traders should closely monitor reactions within China's markets to gauge how low AUD/USD might descend and whether it can breach or rebound from the 2022 low.
Economic Events in Focus (AEDT)
11:00 – NZ Business Confidence
11:30 – AU Reserve Assets
14:00 – BOJ Interest Rate Decision (No change expected)
17:30 – BOJ Press Conference
23:00 – BOE Interest Rate Decision (No change expected)
00:30 – US GDP (Q3)
