U.S. Treasury yields dipped for a second consecutive day as investors recalibrated expectations for Federal Reserve rate cuts, factoring in the risks surrounding the impending presidential election. The dollar held firm, poised for a fourth consecutive weekly gain, as earlier spikes in yields triggered a risk-off sentiment, prompting traders to pare back their bets on aggressive Fed easing. Meanwhile, divisions among European Central Bank policymakers hint at diverging views within the eurozone, adding another layer of complexity to global market sentiment.
Upcoming U.S. economic data, including the widely watched monthly payrolls report, will be pivotal in shaping market direction, providing further insight into the Fed’s potential path. Polls indicate a neck-and-neck race between Donald Trump and Kamala Harris in key swing states, adding to the uncertain outlook. Regardless of the election’s outcome, the dollar index is projected to weaken over the medium term, with expectations that the Fed will pursue further rate cuts to support the economy.
In Japan, the yen remained range-bound against the dollar ahead of the weekend’s parliamentary elections, where the ruling coalition risks losing its majority in the lower house for the first time since 2009. A potential shift in power could exert downward pressure on both the yen and Japanese equities. Bank of Japan Governor Kazuo Ueda underscored a dovish stance, reiterating that interest rate hikes are unlikely in the immediate term. With the yen already near multi-month lows, Ueda’s comments add weight to the outlook for continued policy accommodation.
In U.S. money markets, there is now a strong expectation of a 25 basis-point Fed rate cut next month, with traders pricing in an estimated 43 basis points of total cuts by year-end. This outlook reflects a balancing act between an economy still displaying resilience and the Fed’s cautious approach amid fiscal uncertainties and geopolitical tensions.