Gold Gained Strong Bullish Momentum After the Fed Press Conference
Gold (XAU) moved in a bullish trend on Wednesday, gaining 1.45% and almost recovering all the losses from the previous session. The surge happened after the Federal Reserve (Fed) maintained its key interest rate unchanged but outlined plans for reductions in borrowing costs.
On Wednesday, the Fed left interest rates unchanged as expected. Even though the policy statement highlighted the lack of progress in tackling inflation, it was still focused on potential rate cuts in the future. Indeed, the latest US economic data showed no progress in the decline of inflation. However, Fed Chair Jerome Powell said it was unlikely that there would be an increase in interest rates. He also stated that he didn't view the policy rate of interest as sufficiently restrictive. Following the meeting, US short-term interest rate futures increased as traders raised their bets on the Federal Reserve delivering at least one interest rate reduction this year.
"Powell clearly thinks the policy is restrictive, but there is no evidence of that. Inflation continues to surprise to the upside. I think it is funny investors hang on his every word when this is the same Fed that said they didn't think they would have to hike and the same Fed that less than six months ago said they thought they would cut six times in 2024," said Michael Contopoulos, the head of fixed income at Richard Bernstein.
Yesterday's US macroeconomic data was somewhat mixed. The ADP Employment report showed that US private payrolls increased more than expected in April. Meanwhile, data for the previous month were revised higher, suggesting that inflationary pressure may still be strong. At the same time, the ISM Manufacturing Purchasing Managers' Index (PMI) and JOLTS Job Openings figures were weaker than expected. Overall, the market will probably remain volatile in the mid-term as the US interest rate outlook remains highly uncertain.
XAU/USD slightly declined in the Asian and early European trading sessions. Today, the main focus will be on the US Jobless Claims report at 12:30 p.m. UTC. The data will likely trigger additional volatility and may cause sharp moves in XAU/USD. Lower-than-expected figures will put bearish pressure on the pair, while higher-than-expected outcomes may encourage XAU bulls.
Euro Rises as the Fed Confirms Potential Rate Cuts
The euro (EUR) gained 0.41% on Wednesday as the US Dollar Index (DXY) plunged following the Federal Reserve (Fed) policy meeting. The regulator left its key policy rate unchanged but signaled that it was still planning to reduce the borrowing costs eventually.
The Fed's decision was largely expected, but Fed Chair Jerome Powell also stated that the US central bank was highly unlikely to hike rates even though the progress on tackling inflation has slowed. This comment helped to ease some concerns about the Fed potentially shifting towards a more hawkish monetary policy stance, and the US dollar decreased. Furthermore, relatively weak US macroeconomic data released prior to the Fed's decision supported the euro. The ISM Manufacturing Purchasing Managers' Index (PMI) and JOLTS Job Openings figures were weaker than expected.
Overall, the US interest rate outlook remains highly uncertain and depends almost entirely on upcoming inflation data. The market is currently pricing in just 36 basis points (bps) worth of rate cuts by the Fed in 2024. Meanwhile, traders believe the European Central Bank (ECB) will cut its base rate before the Fed does. There is now a 68% probability that the ECB will deliver a 25-bps rate cut in June. This divergence in monetary policy expectations exerts downward pressure on the euro.
EUR/USD was essentially unchanged during the Asian and early European trading sessions. Today, S&P Global will publish its final PMI reports for European economies. Preliminary data has already been released, so these final data will probably have a relatively minor impact on the market. Today's key event is the US Jobless Claims report, due at 12:30 p.m. UTC, which could cause increased volatility in EUR/USD. Higher-than-expected figures may potentially push the DXY lower and boost EUR/USD. Conversely, lower-than-expected results may trigger a downward correction in EUR/USD. The resistance level at 1.07500 and the support level at 1.06850 are key to watch.
JPY Surges on Speculation About BOJ Intervention in the Forex Market
The Japanese Yen (JPY) surged by 2.21% on Wednesday on speculation about potential intervention by Japanese authorities.
Japanese authorities may have intervened in the currency market, possibly viewing 160 as a critical threshold for USD/JPY, according to Takatoshi Ito, the Columbia University academic and former finance ministry executive.
"Intervention is effective if conducted in a timely manner," said Takatoshi Ito, an associate of former Bank of Japan (BOJ) Governor Haruhiko Kuroda.
"By targeting speculative moves with intervention, the authorities are trying to generate market expectations that 160 could be the ceiling for USD/JPY," he added.
Yesterday, the Federal Reserve (Fed) kept interest rates steady and maintained key elements of its policy guidance and economic outlook. In its policy statement, the Fed emphasized that future rate decisions would depend on economic conditions, particularly when deciding on lower borrowing costs. Fed Chair Jerome Powell reiterated this stance, stating that decisions on the interest rate trajectory will depend on upcoming data, but rate hikes are now unlikely. After the Federal Reserve monetary policy meeting, US short-term interest-rate futures rose as chances of at least one rate cut by the Fed this year increased.
USD/JPY decreased slightly during the Asian and early European trading sessions. Today, the economic calendar is relatively light. However, the release of the US Jobless Claims report at 12:30 p.m. UTC could still trigger some above-normal volatility in all USD pairs. If jobless claims figures rise more than expected, USD/JPY may move lower. Conversely, a smaller-than-expected increase in unemployment claims may be interpreted as a sign of a strong labor market. In theory, this should justify keeping high US interest rates for longer.