Gold Plunged After the Fed Rate Cut and Officials' Comments
Gold (XAU/USD) dropped by 2.3% on Wednesday after the Federal Reserve (Fed) cut the interest rates and decided to pause reductions next year due to high inflation pressure.
The US dollar (USD) surged against major currencies as the Fed cut the base rate as expected, also signaling a slowdown in its monetary easing approach. The Fed now projects it will implement only two 25-basis-point (bps) rate cuts by the end of 2025.
"I believe we are in a favourable position, but I think we are entering a new phase, and we will proceed with caution regarding further reductions", Powell stated during a press conference.
"The Fed was more aggressive than we expected, but today's shift in policy guidance aligns with our view of a prolonged pause by the Fed at the beginning of 2025", Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities, commented. "The most significant surprises were concentrated in the inflation projections. They reinforce the idea that higher inflation will persist for an extended period", he added.
XAU/USD was rising during Asian and early European trading hours, regaining 1.2% after yesterday's losses. Technically and fundamentally, the asset still remains in a bearish trend. Today, the US Initial Jobless Claims report may significantly influence the dynamics of the precious metal. Higher-than-anticipated data may trigger bullish momentum in XAU/USD, while softer data will ignite further downward correction.
Fed Signals a Pause in Rate Cuts, Driving Euro Lower
The euro (EUR/USD) plunged by 1.31% against the US dollar (USD) on Wednesday after the Federal Reserve (Fed) announced an expected interest rate cut but signalled a slower pace of future easing.
The Fed lowered its benchmark policy rate by 25 basis points (bps) towards the 4.25–4.5% range, with officials signalling that they would likely pause future rate cuts next year given a stable labour market and sticky inflation.
The yield of US 10-year Treasuries rose towards 4.446%, hitting a four-week high and pulling the US Dollar Index (DXY) above the 108.000 mark.
"The Fed increased its core inflation forecast and adjusted dot plot, so rate cuts are being priced out, and I think we have one more rate cut priced in for next year, and that's less than it was before", said Axel Merk, president and chief investment officer at Merk Hard Currency Fund.
A strong bearish trend in EUR/USD has reemerged with an even stronger momentum. Bears are now targeting 1.02950, and even a parity level seems possible in the midterm. Investors expect the Fed to lower its base rate towards the 4–4.25% range by mid-June 2025, while the European Central Bank (ECB) will likely cut its rate by more than 50 bps over the same period. This divergence in monetary policy expectations between the ECB and the Fed continues to act as a major bearish factor for EUR/USD.
EUR/USD was rising slightly during the Asian and early European trading sessions. Today, the main focus is on the number of US macroeconomic releases. Weekly Jobless Claims and Gross Domestic Product (GDP) final estimates are due at 1:30 p.m. UTC. Stronger-than-expected figures may push EUR/USD below 1.03315. Worse-than-expected numbers may have a disproportionately stronger impact on EUR/USD and push it above 1.04500, as the greenback seems overbought and overvalued in the short term.
Canadian Dollar Renewed the March 2020 High
On Wednesday, the Canadian dollar (USD/CAD) fell towards a near-five-year low against the US dollar (USD) as the Federal Reserve's (Fed) hawkish guidance boosted the greenback.
The US dollar surged against major currencies after the Fed announced the anticipated rate cut and indicated a slowdown in its monetary policy easing. The Fed's projection for interest rates suggests a median funds rate of 3.875% at the end of 2025, up from the previous projection of 3.375%, indicating only two 25 basis point rate cuts next year.
"We believe this decision marks the beginning of a prolonged pause by the FOMC, although it may be too early to state this explicitly", said Nick Rees, a senior analyst for Monex Europe's foreign exchange market. "We now anticipate that US rates will remain unchanged, at least until the first half of 2025. If this is the case, a shift in market expectations should support the dollar's upward trajectory in the coming months", he added
Domestic political instability has affected the Canadian dollar, adding to the challenges posed by US trade tariffs and the Bank of Canada's aggressive interest rate cuts.
"The demand for protection against a decline in the value of the Canadian dollar has skyrocketed", said Karl Schamotta, chief market strategist at Corpay.
The implied volatility of options contracts for buying or selling the Canadian dollar against the US dollar in the next three months has reached its highest since April 2023—approximately 6.6, up from 4.5 in July. The currency reached a low of 1.46670, last seen in March 2020. Canadian bond yields have increased across the curve, mirroring the movements in US Treasury yields. The 10-year yield has risen by 8.2 basis points, reaching 3.224%.
USD/CAD declined towards the 1.44300 support level during Asian and early European trading hours, retracing some upward movement from yesterday. Today, the US Jobless Claims report comes out at 1:30 p.m. UTC and may affect the pair. Stronger-than-expected data may put some pressure on USD/CAD, while soft data may support a further rally.