Fed Juicing Markets? Morgan Stanley's Currency Prediction

Gold just hit another all-time high. Is the Fed purposely pumping the stock market for political reasons? Regardless, Morgan Stanley expects the Federal Reserve to continuously cut until the middle of 2025. What they say about the U.S. Dollar VS the Japanese Yen will be the most interesting detail to those invested in gold.

The Fed has received heat in the past for downplaying inflation, and then again for potentially overstating the resilience of the economy, so will they now finally be able to justify their position with data? The Fed’s recent decision on a big cut reflects improving trends in inflation and their growing concerns about the labour market.

The recent data release about jobless claims was better than expected. That may prove tricky for the Fed if they want to keep cutting. Their reason for holding rates high for so long was that the economy was too strong to be affected. Every release of positive job data supported their cause. So why are they cutting to support the labour market in the face of positive data? They could simply be trying to ensure the soft landing was a success. BitMEX exchange co-founder Arthur Hayes was interviewed in Singapore last week and stated that he thinks Jerome Powell and Janet Yellen are trying to 'juice' the financial markets to help Kamala Harris win the U.S. presidential election. Whether this is true is a mystery, but Trump did tell Powell he does not want him to cut before the election or it will boost the Democrat’s chances of winning. Whatever the motive, the effects should be the same.

The Fed's latest Summary of Economic Projections, which now showed four rate cuts this year, contrasted against the markets' single price cut. Projections were in line with softer inflation and 'weakening labour markets'. Federal Reserve Chairman Jerome Powell has indicated that future cuts would be data dependent. Morgan Stanley predicts that the Fed will announce two more 25bp cuts by the end of 2024 and another four in the first half of 2025. 

Morgan Stanley's Currency Strategy & What it Means for Gold

The bank's foreign exchange strategy has advised a short position on USD/JPY. With the easing cycle of the Fed, the dollar can be expected to keep facing downward pressure, and this provides a great avenue for traders to capitalise on potential weakness in the USD/JPY as this approaches the 138-target level.

Traditionally, USD/JPY moves inversely with the price of gold. This trend may return with force, especially if Japan avoids cutting again. This means that Morgan Stanley’s prediction is potentially very bullish for the gold price.