Fed Rate Cut Bets Boost Markets, Euro Faces Headwinds (09.16.2024)

This week, the EUR/USD pair opened positively, trading around 1.1090 as markets focused on the upcoming Federal Reserve policy decision, with a 59% probability of a 50 basis point rate cut. The ECB’s cautious stance with weak Eurozone growth could limit the euro's upside movement. The Japanese yen strengthened to 140.5, driven by the growing divergence between US and Japanese monetary policies, with the BoJ expected to hold rates but signal future hikes. Gold hit a record high near $2,590, supported by a weaker dollar and rising Fed rate cut expectations. The GBP/USD pair saw modest gains, benefiting from USD depreciation, but upcoming BoE and Fed decisions may influence its trajectory. Silver surged to a two-month high of $31, fueled by speculation of a larger Fed rate cut, while weak Chinese economic data tempered demand concerns for metals.

ECB's Cautious Stance Limits Euro

EUR/USD kicked off the week positively, trading around 1.1090 during Monday's Asian session. Investors are now focused on the upcoming Federal Reserve (Fed) policy decision later this week. The market is split on whether the Fed will implement a 25 basis point (bps) or a 50 bps rate cut. According to the CME FedWatch Tool, there's a 41.0% chance of a 25 basis point cut by the Fed at its September meeting, while the probability of a 50 basis point cut has risen to 59.0%, up from 50.0% the previous day. Investors will be keenly observing the FOMC Press Conference for any hints about future US interest rate moves. A more aggressive easing stance from Fed Chair Jerome Powell could exert downward pressure on the US Dollar, potentially boosting the EUR/USD pair. On the European side, ECB Governing Council member and Central Bank of Ireland Governor Gabriel Makhlouf mentioned on Friday that the ECB is navigating a "highly uncertain environment" and will base future monetary policy decisions on incoming data. Makhlouf stressed that the ECB is not committed to a specific rate path but is "determined to ensure" that inflation in the Eurozone returns to the 2% target "in a timely manner." Rabobank’s analysis highlights that the ECB made its second rate cut of the cycle last week, with expectations for another cut before the year’s end. The latest ECB staff projections also show a downward revision in Eurozone growth. While potential Fed easing might weaken the USD, Rabobank notes that challenging Eurozone fundamentals could limit the EUR/USD pair's upside potential in the near term.

The first support level for EUR/USD is at 1.1070. If this level is breached, the next supports to watch will be 1.1040 and 1.1000. On the upside, the first resistance is at 1.1120; if this level is surpassed, the next targets will be 1.1150 and 1.1200.

Yen Strengthens on Diverging Monetary Policies

On Monday, the Japanese yen strengthened to around 140.5 in light holiday trading, nearing its highest level since July 2023 due to a growing divergence in monetary policies between Japan and the US. The Bank of Japan (BoJ) is expected to keep interest rates unchanged this week but may signal a potential rate hike as early as October. BoJ board member Naoki Tamura recently suggested short-term rates should rise to 1% by fiscal 2026 to consistently reach the 2% inflation target. Similarly, BoJ board member Junko Nakagawa indicated that rates will continue to rise if economic and inflation trends align with projections.

Meanwhile, the US Federal Reserve is expected to cut rates this week for the first time in four years, with markets anticipating a larger 50 basis point reduction.

Technically, resistance for the yen stands at 140.50, with potential targets at 141.00 and 142.00. On the downside, support begins at 140.00, with further levels at 139.40 and 139.00.

Gold Hits Record High as Market Awaits Fed Rate Cut Decision

Gold surged to nearly $2,590 per ounce, setting a new record high, driven by a weaker dollar and falling bond yields amid rising expectations of a significant US interest rate cut this week. Fed fund futures indicate that investors are leaning towards a 50 basis point cut, with a 59% probability, while a smaller 25 basis point reduction is seen as a 41% possibility, according to CME's FedWatch Tool. This follows weak August payroll data, signaling a softening labor market, alongside a downward inflation trend in the US despite some persistent pressures.

Gold also found support from last week’s European Central Bank decision to lower its main interest rate, reflecting confidence that Eurozone inflation is gradually easing.

Technically, the first support level for gold is at $2,550, followed by $2,525 and $2,500. On the upside, resistance is at $2,600, with further targets at $2,620 and $2,650.

GBP/USD Sees Modest Gains with Low Trading Volumes

The GBP/USD pair saw some dip-buying, supported by lower trading volumes due to holidays in China and Japan. The pair is trading around 1.3135-1.3140, marking a modest gain of over 0.10% and nearing a one-week high from Friday, driven by ongoing USD devaluation.

The British Pound is benefiting from expectations that the Bank of England (BoE) will make fewer policy changes compared to the Federal Reserve in the coming year. However, market anticipation of further BoE rate cuts, following weak UK wage growth and stagnant GDP for July, may limit the pair’s bullish momentum.

Traders are cautious before key central bank meetings, with the Fed's decision on Wednesday and the BoE's on Thursday, both likely to shape the GBP/USD pair's future. Despite this uncertainty, broader market conditions favor USD bears, suggesting potential for the pair to continue rebounding from last week's low at the 1.3000 psychological level.

For GBP/USD, initial support is at 1.3100, followed by 1.3050 and 1.3000. On the upside, resistance begins at 1.3165, with further levels at 1.3215 and 1.3265.

Silver Hits Two-Month High Amid Fed Rate Cut Expectations

Silver surged to around $31, a two-month peak, as expectations grew that the Federal Reserve might implement a larger interest rate cut in its upcoming meeting. The FedWatch Tool shows a 59% chance of a 50 basis point cut on Wednesday, up from 25% a month ago, while a smaller 25 basis point cut has a 41% probability. This shift follows signs of a slowing labor market, outweighing last week's strong inflation data.

Meanwhile, weak economic data from China, including low industrial production, retail sales, and fixed asset investment for August, along with rising unemployment and a sharp drop in home prices, has dampened demand concerns for metals.

Silver faces resistance at $31.15, with further levels at $31.50 and $32.00. On the downside, support is at $30.80, followed by $30.15 and $29.85.