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Market Reaction to Geopolitical Tensions: Dollar Softens, Treasuries Marginally Lower

5 months ago

In response to the recent escalation of geopolitical tensions, the dollar experienced a dip, indicating that global traders remained relatively unfazed by the developments. On Friday, Treasuries saw a slight decline after the 10-year yield had fallen six basis points the day before. Federal Reserve Bank of Cleveland President, Loretta Mester, expressed resistance to the idea of a rate cut in March and emphasized that the inflation figures highlighted the need for continued policymaker attention.

Crucial for investors is the belief that the Fed has concluded its rate-raising activities. The timing and frequency of potential future cuts, whether in March or June and whether four, three, or two times, become secondary considerations.

SARACEN MARKETS suggests that investors should proactively position themselves for a possible risk-off movement, emphasizing that current market optimism regarding a Federal Reserve cut in March might be excessive.

US equity futures experienced a slip following Thursday’s minimal changes in Wall Street benchmarks, despite robust inflation data failing to diminish expectations of future Federal Reserve interest-rate cuts.

Data from the US consumer price index revealed higher-than-expected headline prices in December, with core inflation seeing a decrease, albeit less than consensus estimates. Swaps pricing for a cut by March saw a slight uptick on the day, returning to levels observed at the close of 2023.

Following joint military strikes against Houthi rebels in Yemen by the US and its allies, prompted by the rebels’ attacks on ships in the Red Sea, West Texas Intermediate surged over 2% to surpass $73. The news of the airstrikes also had a positive impact on gold prices.

Commodity-linked currencies, notably the Australian dollar, experienced modest gains in light of the rise in crude oil.

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