Fed Rate Speculation Drives Currency and Commodity Markets (10.02.2024)

The EUR/USD pair experiences mild gains around 1.1070 as Middle East tensions weigh on risk assets, with eyes on US ADP Employment data and potential Fed rate cuts. 

The Japanese yen remains steady amid policy uncertainty and improved consumer confidence, while gold hovers near $2,660 on safe-haven demand due to escalating conflict in the region. GBP/USD stays subdued after recent losses, influenced by geopolitical risks and Bank of England policy signals. Silver trades within a narrow range below mid-$31.00s, lacking momentum to break higher. Key support and resistance levels across assets reflect market caution amidst rising global tensions and mixed economic data.

Rate Hike Expectations Weigh on Euro

The EUR/USD pair is seeing modest gains, trading around 1.1070 during Wednesday’s Asian session. However, rising geopolitical tensions in the Middle East may pressure risk-sensitive assets like the euro. Investors await the US ADP Employment Change data for September, due later today. Traders are also considering the possibility of a significant rate cut by the US Federal Reserve in November, particularly after Fed Chair Jerome Powell indicated a gradual approach to lowering rates. According to the CME FedWatch Tool, markets currently anticipate a 37.4% chance of a 50 basis point cut in November and a 62.6% chance of a 25 basis point reduction. 

Weak US economic data has weighed on the dollar, with the ISM Manufacturing PMI staying flat at 47.2 in September, below the expected 47.5, indicating continued contraction in manufacturing. In Europe, September inflation in the Eurozone eased to 1.8% year-on-year, falling below the ECB’s target and marking its lowest since April 2021. Despite these favorable inflation figures, the Eurozone economy remains under pressure, leading the ECB to cut rates to 3.50%, hinting at potential further reductions. Geopolitical risks, such as Iran’s launch of over 200 ballistic missiles at Israel and Israel’s promise of retaliation, could put downward pressure on the euro and stimulate safe-haven assets like the US dollar. 

For the EUR/USD pair, the first support level stands at 1.1050, followed by 1.1010 and 1.0990 if breached. On the upside, resistance is at 1.1100, with further targets at 1.1130 and 1.1200 if surpassed.

Yen Stability on Policy Uncertainty

On Wednesday, the Japanese yen hovered around 143.5 per dollar, lacking clear direction amid ongoing uncertainty about Bank of Japan interest rate hikes. Newly appointed Economy Minister Ryosei Akazawa cautioned that the central bank should be cautious about increasing rates, noting the time needed to fully exit deflation. Incoming Prime Minister Shigeru Ishiba also indicated he would support households facing rising prices and a sluggish economy, suggesting that further rate hikes would depend on certain conditions being met. Additionally, September data revealed improved consumer confidence in Japan, driven by optimistic projections for income growth, employment, and the willingness to purchase durable goods. The yen received some support as investors turned to safe-haven assets due to escalating conflict in the Middle East.

From a technical perspective, the first resistance level is at 144.60. If this level is surpassed, the next targets will be 146.30 and 147.15. On the downside, the initial support is at 143.00; if this level is breached, the next support to watch will be 141.75 and 140.40.

Manufacturing Contraction Impact Gold Prices

On Wednesday, gold hovered near $2,660 per ounce, close to record highs, driven by safe-haven demand amid escalating fears of a potential all-out war in the Middle East following Iran's missile launch targeting Israel. Iran reportedly fired over 180 ballistic missiles at Israel in retaliation for Israeli military actions against Hezbollah in Lebanon. In response, the Israeli military announced it would intensify air strikes across the region and vowed retaliation against Iran. Meanwhile, recent economic data showed a mixed outlook: the ISM PMI indicated a sharp contraction in the US manufacturing sector, while softer factory gate prices suggested the Fed could continue lowering rates. However, job openings surged to 8.04 million, exceeding expectations, and Fed Chair Powell hinted that any further cuts would likely be smaller, possibly in increments of a quarter percentage point.

Technically the first support level is at 2,650. If this level is breached, the next supports to watch will be 2,630 and 2,600. On the upside, the initial resistance is at 2,665; if this level is surpassed, the next targets will be 2,685 and 2,700.

Interest Rate Outlook Shape Pound's Trajectory

GBP/USD is trading around 1.3280 during Wednesday's Asian session, remaining subdued after losses in the previous day. This decline is likely due to rising geopolitical tensions in the Middle East, which are weighing on the risk-sensitive Pound Sterling (GBP). In the UK, Bank of England (BoE) policymaker Megan Greene warned that a consumption-driven recovery could trigger a new wave of inflation. However, she indicated that further interest rate cuts are probable as prices are "moving in the right direction." Greene also noted that the neutral interest rate has likely increased since the inflation shock, although she did not provide a specific figure. Traders are now looking forward to the US ADP Employment Change report and comments from Federal Reserve officials for additional insights, while the BoE’s Monetary Policy Report Hearings on Thursday will also be closely monitored.

For GBP/USD, the initial support lies at 1.3250, followed by 1.3200 and 1.3150 below. On the upside, the first resistance is at 1.3315, with subsequent levels at 1.3375 and 1.3425 if the pair breaks above this resistance.

Silver Struggles to Break Range

Silver (XAG/USD) is having difficulty building on yesterday's gains, trading in a narrow range below the mid-$31.00s during Wednesday's Asian session.

From the technical perspective, the first resistance level to watch is at 31.30. If silver breaks above this level, the next resistance levels to watch will be 31.70 and 32.00, respectively. On the downside, the initial support level is at 31.00, with subsequent support levels at 30.55 and 30.00.