Geopolitical Risk Premium Scaled Back as USD & US Yields Continue to Fall

The US dollar continued its downward correction overnight before the CPI from US, causing the dollar index to dip after reaching an intra-day low of 105.56 yesterday. Over the past week, the US dollar has been the weakest performer among G10 currencies, particularly struggling against the Swiss franc, where it lost 1.0% of its value. Geopolitical tensions in the Middle East have favoured the Swiss franc, although the broader financial markets have remained relatively stable.

The price of Brent crude initially surged to USD 89 per barrel on Monday but has since retreated to around USD 85 per barrel. This reflects a growing sense of confidence among market participants that the conflict between Hamas and Israel is unlikely to escalate into a larger regional issue that would significantly disrupt financial markets. The New York Times reported yesterday that the US has obtained intelligence suggesting that key Iranian leaders were surprised by the Hamas attack in Israel, raising doubts about Iran's direct involvement in planning the assault.

Despite improving global investor sentiment, US bond yields have continued to decline. This trend, triggered by heightened geopolitical uncertainty in the Middle East, has caused the 10-year US Treasury yield to drop from its recent peak of 4.89% to approximately 4.5%. This correction in bond yields may be a response to the overselling that occurred since the beginning of September and reflects a shift in the Federal Reserve's policy stance since last week. Fed officials have indicated that they are less likely to proceed with their plans for a final rate hike later this year if higher market rates persist.

The release of the latest Federal Open Market Committee (FOMC) minutes from the hawkish September meeting has not convinced US rate market participants to price in a higher likelihood of a final rate hike.

I’ve explained all the minutes from FOMC on this video:

Currently, there are only 3 basis points (bps) of rate hikes priced in for the November FOMC meeting and 7 bps for the December FOMC meeting. The September FOMC meeting reinforced the upward adjustment in US yields as the Fed signalled a likelihood of keeping rates higher for an extended period. However, the recently released minutes (https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20230920.pdf) appear less hawkish in comparison. They indicate that "participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the committee’s goals had become more two-sided." "All participants" agreed that the committee should proceed with caution, considering the "balance of risks."

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.