Markets Await Fed Rate Decision, Driving Volatility in Currencies and Commodities (09.18.2024)

Global financial markets are bracing for key monetary policy decisions from the Federal Reserve, Bank of England, and Bank of Japan this week. The EUR/USD gained strength, trading around 1.1125 as investors anticipate a potential 50-basis-point rate cut by the Fed. The Japanese yen also strengthened, recovering to 141.6 per dollar amid expectations for both U.S. and Japanese monetary decisions. Gold held steady near record highs at $2,570 per ounce, while silver retreated slightly from its two-month peak, as traders await further clarity from the Fed’s rate cut decision. Meanwhile, the British pound edged higher ahead of UK inflation data and the BoE policy meeting, with expectations that the BoE will maintain rates at 5% for now.

EUR/USD Gains Ahead of Fed Decision and Eurozone Inflation Data

The EUR/USD pair is trading stronger around 1.1125 during the Asian session on Wednesday, supported by rising expectations of a deeper rate cut by the U.S. Federal Reserve. Key highlights for the day include the Eurozone’s Harmonized Index of Consumer Prices (HICP) data and the Fed’s monetary policy meeting. Market sentiment remains divided on whether the Fed will cut interest rates by 25 or 50 basis points (bps). Futures for the Fed funds rate now indicate nearly a 65% chance of a 50 bps cut at the September meeting, up from 45% last Friday, according to LSEG. Boris Kovacevic, a global macro strategist at Convera in Vienna, noted, "If they opt for a 50 bps cut, it may suggest the Fed has information that investors lack, indicating that recession risks could be greater than currently anticipated. "In economic data, U.S. retail sales unexpectedly rose by 0.1% month-over-month in August, following a revised 1.1% increase in July, and exceeding expectations of a 0.2% decline, according to the U.S. Census Bureau. Additionally, industrial production jumped by 0.8% in August, rebounding from a 0.6% decline in July and surpassing the consensus estimate of 0.2%. Meanwhile, less dovish guidance from European Central Bank (ECB) officials is bolstering the Euro against the dollar. ECB policymakers have emphasized that future monetary policy decisions will remain data-dependent. Investors are also awaiting the Eurozone HICP inflation data which is due later today. The headline HICP is expected to show a year-on-year increase of 2.2% for August, while the core HICP is estimated to rise by 2.8% in the same period.

In the pair, the first support level is at 1.1100. If this level is breached, the next supports to watch will be 1.1050 and 1.1000. On the upside, the first resistance is at 1.1150; if this level is surpassed, the next targets will be 1.1200 and 1.1250.

Japanese Yen Recovers as Markets Eye Fed Rate Cut and BoJ Outlook

The Japanese yen strengthened to around 141.6 per dollar on Wednesday, recovering some losses from the previous session that were prompted by strong U.S. retail sales data. Investors are preparing for key monetary policy decisions from both Japan and the U.S. this week. The Bank of Japan is expected to keep rates unchanged on Friday but is likely to indicate future rate hikes. Markets are anticipating an interest rate increase in December, with a potential move in October remaining uncertain. Meanwhile, the U.S. Federal Reserve is widely expected to announce its first rate cut in four years on Wednesday, with markets pricing in a two-thirds chance of a substantial 50 basis point reduction. On the economic front, data revealed that Japan's exports grew less than anticipated in August, while imports saw their smallest increase in five months.

From a technical perspective, the first resistance level is at 142.50. If this level is surpassed, the next targets will be 143.60 and 144.60. On the downside, the initial support is at 140.50; if this level is breached, the next supports to watch will be 140.00 and 139.40.

Gold Holds Firm Ahead of Anticipated Fed Rate Cut

Gold held steady at around $2,570 per ounce on Wednesday, remaining close to record highs amid a weaker dollar ahead of the highly anticipated Federal Reserve interest rate decision. The FOMC's policy meeting lasting for two days concludes later today, with the Fed expected to announce its first rate cut since 2020. Fed fund futures indicate a growing expectation for a 50-basis-point cut, with a 65% probability priced in, while the likelihood of a smaller 25-basis-point reduction stands at 35%. On Tuesday, gold saw a slight decline as U.S. retail sales rose by 0.1% in August, contrary to forecasts of a 0.2% drop, following a revised 1.1% increase in July. This suggests relatively strong consumer spending. Meanwhile, the Bank of England is anticipated to keep UK rates unchanged on Thursday, while the Bank of Japan is likely to maintain its rates on Friday but may signal a willingness to hike if economic forecasts are met.

Technically the first support level is at 2,550. If this level is breached, the next support levels to watch will be 2,525 and 2,500. On the upside, the initial resistance is at 2,585; if this level is surpassed, the next target levels will be 2,600 and 2,620.

Pound Edges Higher as UK Inflation Steadies, BoE Decision Looms

GBP/USD edged up to around 1.3160 during the Asian session on Wednesday as traders awaited the release of August's Consumer Price Index (CPI) figures from the UK. Attention will then shift to the Federal Reserve's interest rate decision later in the North American session. The UK CPI rose at an annual rate of 2.2% in August, consistent with July’s figure, while the core annual CPI increased to 3.5%, up from 3.3%. Monthly inflation has grown by 0.3%, rebounding from a 0.2% decline in July. The Bank of England is set to announce its monetary policy on Thursday, with inflation levels likely influencing their decision. Financial markets anticipate the BoE will maintain its current interest rate at 5%, with a more aggressive stance expected to start in November. The BoE also forecasts inflation could reach 2.75% in the coming months before gradually declining, potentially falling below the 2.0% target by 2025.

For GBP/USD, the initial support is 1.3150, followed by 1.3110 and 1.3080 respectively. On the upside, the first resistance is at 1.3180, with subsequent levels at 1.3215 and 1.3265 if the pair breaks above this resistance.

Silver Dips Below $30.5 as Traders Await Fed Rate Decision

Silver prices dipped below $30.5 per ounce, retreating from their highest level in two months as traders became cautious ahead of an important monetary policy decision from the Federal Reserve. The U.S. central bank is widely expected to implement its first rate cut in four years, but there is uncertainty about whether it will opt for a 50 or 25 basis point reduction. Additionally, the Bank of England and the Bank of Japan are also set to announce their monetary policy decisions this week. Compounding these factors, disappointing economic data from China raised concerns about demand in the world’s largest metals consumer. Recent figures showed that industrial output, retail sales, and fixed asset investments in China fell short of expectations for August. The urban unemployment rate climbed to a six-month high, and home prices experienced their steepest decline in nine years.

From a technical standpoint, the initial resistance level to monitor is at 30.70. If silver breaks above this level, the next resistance levels to watch will be 31.15 and 31.50, respectively. On the downside, the initial support level is at 30.30, with subsequent support levels at 29.85 and 29.15.