Monetary Policy Divergence Fuels Market Volatility (12.19.2024)

Recently, divergences in monetary policies among major central banks and economic uncertainties have caused volatility in financial markets. The Fed's signal of limited rate cuts strengthened the dollar, putting pressure on other G10 currencies and commodities. 

Currencies like the euro, yen, and pound weakened, while gold rose on a technical rebound despite earlier losses. Silver continued its downward trend due to weaker industrial demand, exacerbated by China's overcapacity and monetary easing policies. In Europe and the UK, high inflation and slowing growth challenge central banks, while strong US growth and safe-haven demand strengthen gold.

Sluggish Economy, Inflation Woes, and Political Uncertainty in Eurozone

The euro dropped to $1.0350, nearing a low last seen in November 2022, pressured by dollar strength following the Fed's hawkish 2025 outlook. While the Fed cut rates by 25bps, it signaled just 50bps of cuts for 2025, half of what was projected in September. Meanwhile, the ECB has already cut rates four times this year and remains cautious about further easing, though analysts suggest accelerated policy loosening may be needed to support the fragile Eurozone economy. Flash PMIs signaled a slower contraction in private sector activity, with Germany and France underperforming. Inflation rose less than expected to 2.2%, missing initial estimates of 2.3%. Political uncertainty also weighs on the euro, with Germany's Chancellor losing a confidence vote and France's new government facing challenges, including passing the 2025 budget.

Technically, the first resistance level will be 1.0400 level. In case of this level’s breach, the next levels to watch would be 1.0460 and 1.0520 consequently. On the downside, 1.0335 will be the first support level. 1.0230 and 1.0200 are the next levels to monitor if the first support level is breached.

Yen Hits One-Month Low as BOJ Holds Rates Steady

The Japanese yen fell past 155 per dollar on Thursday, reaching a one-month low after the Bank of Japan left its policy rate unchanged at 0.25%, as widely expected. Now the focus is on BOJ Governor Kazuo Ueda’s post-meeting press conference for insights into the timing of future rate hikes. Prior to the decision, speculation had been growing that the BOJ might hold off on tightening its policy, with policymakers opting to take more time to assess the economic data. Additionally, the yen faced pressure from a strengthening US dollar, after the US Federal Reserve delivered a widely anticipated 25 basis point rate cut on Wednesday but signaled fewer rate reductions in 2025. The Fed now projects only two rate cuts next year, down from the four reductions forecast in September.

The key resistance level appears to be 156.75, with a break above it potentially targeting 158.30 and 160.00. On the downside, 153.90 is the first major support, followed by 152.70 and 151.00 if the price moves lower.

Gold Rebounds Above $2,610 Amid Hawkish Fed and Data Watch

Gold rose above $2,610 per ounce on Thursday, likely due to a technical recovery after losing more than 2% in the previous session. The decline followed the Federal Reserve’s hawkish signal of fewer rate cuts next year, with the dot plot projections showing only two rate cuts in 2025, supported by strong GDP growth and persistent inflation. This outlook has pressured gold demand, as limited monetary easing reduces the appeal of non-yielding assets like bullion. Traders will now closely watch upcoming US GDP and PCE inflation data this week, which could further shape monetary policy expectations. Gold has surged over 27% this year, heading for its largest annual gain since 2010, driven by US monetary easing, strong safe-haven demand, and robust central bank purchases.

Technically, the first resistance level will be 2615 level. In case of this level’s breach, next levels to watch would be 2635 and 2660 consequently. On the downside 2575 will be the first support level. 2530 and 2500 are next levels to monitor if the first support level is breached.

Pound Hits One-Month Low Amid Fed’s Hawkish Signals

The British pound fell to $1.26, testing its lowest in nearly one month and tracking the pressure in other G10 currencies as hawkish signals from the Federal Reserve triggered a sharp rise for the US dollar. The Fed lowered its funds rate by 25bps, as expected, but projected only two rate cuts next year to underscore growing inflation concerns by FOMC members. In turn, the Bank of England is expected to hold its Bank Rate unchanged and continue heeding elevated inflation domestically. The annual inflation rate in the UK rose for a second month to 2.6% in November as expected. The services inflation steadied at 5%, below forecasts of 5.1% but above the BoE's estimate of 4.9%. Early in the week, UK wage growth surpassed expectations.

The first resistance level for the pair will be 1.2600. In case of this level's breach, the next levels to watch would be 1.2645 and 1.2700. On the downside 1.2550 will be the first support level. 1.2500 and 1.2460 are the next levels to monitor if the first support level is breached.

Fed Policy and China’s Solar Woes Weigh on Silver Prices

Silver fell below $29 per ounce in December, a three-month low, pressured by a hawkish Federal Reserve and weak industrial demand outlook. The Fed projected fewer rate cuts for 2025, citing persistent inflation and risks from expansionary fiscal policies under the incoming Trump administration. This outlook dampened demand for silver as an industrial input, causing the metal to underperform gold in Q4. In China, overcapacity in the solar panel industry led companies to join a self-discipline program to regulate supply, further limiting silver demand. Additional pressure came from the potential yuan devaluation under China's looser monetary policy, reducing export prices from the world's top supplier.

Technically, the first resistance level will be 29.85 level. In case of this level’s breach, the next levels to watch would be 30.20 and 30.70 consequently. On the downside 29.35 will be the first support level. 29.00 and 28.50 are the next levels to monitor if the first support level is breached.