Fed Rate Cut Speculation Fuels Currency and Commodity Gains (09.13.2024)

EUR/USD Extends Recovery with USD Weakness 

The EUR/USD pair extended its recovery from the 1.1000 psychological level—a nearly four-week low—gaining traction for the second day on Friday. The momentum pushed the pair to the upper end of the weekly range, around the 1.1090 level during the Asian session, driven by broad-based weakness in the US Dollar (USD). The soft US Producer Price Index (PPI) report released on Thursday increased speculation that the Federal Reserve might implement a more significant interest rate cut next week. This, combined with a generally positive risk sentiment, has pushed the USD to a more than one-week low, providing support for the EUR/USD pair. The European Central Bank (ECB) also chose not to give specific interest rate guidance, which supports the euro and the currency pair. 

In the pair, the first support level is at 1.1040. If this level is breached, the next supports to watch will be 1.1015 and 1.0990. On the upside, the first resistance is at 1.1090; if this level is surpassed, the next targets will be 1.1150 and 1.1200.  

Yen Nears Year-to-Date Highs on Hawkish BoJ Outlook 

The yen approached year-to-date highs on Friday, climbing back toward 141 per dollar, driven by a strong hawkish stance on the Bank of Japan (BoJ) monetary policy. BoJ board member Naoki Tamura stated on Thursday that the central bank aims to raise short-term rates to around 1% through fiscal 2026 to consistently achieve its 2% inflation target. Additionally, BoJ board member Junko Nakagawa indicated that the central bank will continue to increase interest rates if economic and inflation trends align with its forecasts. Fitch has also updated its projections for Japan’s policy rate, expecting it to reach 0.5% by the end of 2024, 0.75% in 2025, and 1% by the end of 2026. The yen gained further from a general decline in the dollar, fueled by rising expectations that the Federal Reserve might implement a more substantial 50 basis point rate cut next week. 

From a technical perspective, the first resistance level is at 141.90. If this level is surpassed, the next targets will be 142.90 and 143.50. On the downside, the initial support is at 140.50; if this level is breached, the next support to watch will be 140.00 and 139.00.  

Gold Hits Record High at $2,560 on Rate Cut Expectations 

Gold surged to approximately $2,560 per ounce on Friday, reaching a new all-time high amid a weaker dollar and declining bond yields. This rally was fueled by fresh economic data that heightened expectations for a more aggressive Federal Reserve response to upcoming interest rate cuts. Recent data showed an increase in initial jobless claims and a softening labor market, with weak payroll figures from August reinforcing this trend. Additionally, US producer prices rose slightly more than anticipated in August due to higher service costs, though the overall inflation trend still pointed toward easing. Markets are currently predicting a 59% chance of a 25 basis point rate cut and a 41% chance of a 50 basis point reduction, according to the CME FedWatch tool. In Europe, the European Central Bank followed through with a 25 basis point rate cut as expected, reflecting increasing confidence among policymakers that inflation is on a sustained downward trajectory. 

Technically the first support level is at 2,545. If this level is breached, the next supports to watch will be 2,530 and 2,510. On the upside, the initial resistance is at 2,570; if this level is surpassed, the next targets will be 2,585 and 2,600. 

2,510. If this level is breached, the next supports to watch will be 2,495 and 2,470. On the upside, the initial resistance is at 2,530; if this level is surpassed, the next targets will be 2,550 and 2,585.

GBP/USD Gains Ground, Pound Rises Against Dollar 

The GBP/USD pair gained positive traction for the second day in a row, recovering further from a three-week low around the 1.3000 level reached on Wednesday. The momentum pushed spot prices into the mid-1.3100s, marking a fresh weekly high during the Asian session, driven by widespread weakness in the US Dollar (USD). The USD Index (DXY), which measures the Greenback against a basket of currencies, fell to over a one-week low following increased expectations of a larger interest rate cut by the Federal Reserve (Fed), influenced by the weak US Producer Price Index (PPI) report on Thursday. Dovish Fed expectations have kept US Treasury bond yields near 2024 lows, which, coupled with positive market sentiment, has undermined the safe-haven USD and supported the GBP/USD pair.  

Despite speculation that the Bank of England (BoE) might cut interest rates further, particularly in light of recent data showing a slowdown in UK wage growth and flat GDP for July, the markets expect the BoE to ease policy less aggressively than the Fed over the coming year. This outlook benefits the British Pound (GBP) and adds additional support to the GBP/USD pair. However, it remains to be seen whether the bulls can maintain their momentum or adopt a cautious stance ahead of next week's key central bank meetings. The Fed is set to announce its policy decision at the end of a two-day meeting next Wednesday, followed by the BoE's crucial meeting on Thursday, which will be pivotal in shaping the GBP/USD pair's direction and determining the next significant move. 

For GBP/USD, the initial support lies at 1.3100, followed by 1.3050 and 1.3000 below. On the upside, the first resistance is at 1.3165, with subsequent levels at 1.3215 and 1.3265 if the pair breaks above this resistance.  

Silver Nears $30 on Strong Demand Prospects 

Silver surged towards $30 per ounce and was poised for a 7% gain this week, strengthened by speculation that the US Federal Reserve might implement a substantial 50 basis point rate cut in its upcoming meeting. Analysts highlighted media reports from the Financial Times and the Wall Street Journal, which suggested that the Fed’s decision would be a close call, as well as the recent rise in US jobless claims, as key drivers behind these expectations. Currently, markets are pricing in a 57% probability of a 25 basis point rate cut and a 43% chance of a more significant 50 basis point reduction, according to CME’s FedWatch Tool. Additionally, market participants are assessing demand prospects in China, the world’s largest consumer of silver, amid mixed economic data, and considering the growth of the renewable energy sector, where silver plays a critical role in solar panel production. 

The first resistance level to watch is at 30.40 from the technical perspective. If silver breaks above this level, the next resistance levels to watch will be 30.80 and 31.20, respectively. On the downside, the initial support level is at 29.85, with subsequent support levels at 29.40 and 29.00.