The FOMC meeting was one of the key events for the week, and while the US central bank did cut interest rates by 25bp as expected, that wasn’t the main story to emerge. Instead, it was what Fed Chairman Jerome Powell had to say about what may or may not occur at the December meeting.
Heading into this FOMC meeting, expectations were that this October rate cut would be followed by a cut of similar proportions come December, but Powell has poured cold water on that idea - to the chagrin of risk assets. At his press conference, Powell said that a December rate cut was far from being a foregone conclusion, which leaves investors feeling rather less optimistic that a further rate cut will be delivered by year end.
The US Dollar and treasury yields were among the winners from the Fed’s ‘hawkish’ rate cut today. With greater doubt now surrounding the possibility of a December rate cut, treasury yields jumped which dragged the Dollar along for the ride. The Dollar Index (DXY) moved back above the 99 level. The euro, Pound and yen were all softer against the USD, as was the AUD which came down from its highs above the 0.66c level following the stronger Australian quarterly inflation print, which all but dashed hopes of a November rate cut from the RBA (Reserve Bank of Australia).
The rejuvenated US Dollar and treasury yields added to gold’s recent woes, with the precious metal taking another step back on yield recalculations. With a possible December FOMC rate cut now looking as if it’s a toss-up, gold lost ground from a yield perspective. Spot gold was seen trading at $3941 in Asian morning trading hours on Thursday. There remains a potential pathway higher for gold, however dialled-back rate cutting expectations from the Fed does make things trickier for the precious metal. But, if the US labour market continues to decline, then the Fed may still be forced into delivering a year-end rate cut. Levels to watch include support at $3940, $3878, and $3780, while resistance awaits at $4060, $4100, and $4225.
Another factor not helping gold is optimism surrounding the meeting at the APEC summit in South Korea this week. Representatives from both the US and China have been sounding hopeful ahead of the highly touted heavyweight meeting. If the two leaders can emerge from South Korea with a trade deal that ticks the boxes regarding China’s rare earths exports and the alleviation of additional US tariffs, that could help traders get over Powell’s hawkish tone.
Elsewhere, oil prices have bounced back from their October lows suffered last week, with US sanctions on Russian oil giants Rosneft and Lukoil raising questions over how Chinese and Indian imports of crude may be affected. US oil prices have reclaimed the $60 level, however speculation that OPEC+ may announce further supply increases for December is capping the extent of the upside move.
Meanwhile, US Q3 earnings season continues, with more than 83% of S&P500 companies beating expectations so far. It’s a particularly big week for the tech behemoths, with investors looking for solid earnings results to justify the lofty price valuations.
Among central banks, while the Fed has delivered a rate cut this week, the BOJ and ECB are expected to hold rates steady when they announce monetary policy settings today. The yen has been under pressure ever since the Japanese elections earlier this month on economic stimulus expectations.
Japan’s national core CPI moved higher to 2.9% last month (as released in data last Friday), which remains above the inflation target of 2% and could keep the BOJ on track to hike rates by year-end if not this week. As such, the messaging from the BOJ today in terms of forward guidance could create further volatility in yen trades.