Fed’s dovish gesture sinks dollar, gold jumps | CMC Markets Daily Commentary
The dollar index tumbled over 0.6% overnight, following a dovish outlook given by the US central bank in the Federal Open Market Committee (FOMC) meeting just a couple of hours ago. Fed chairman Jerome Powell has removed ‘patient’ in his statement and underscored ‘uncertainties’ in economic conditions that will increase the case for a rate cut amid a tepid inflation outlook. The policy rate was kept unchanged at 2.25-2.50% at the June meeting, and the expectation for a July rate cut has now surged to 100% percent, from 88% seen a day ago.
The dovish Fed sent heatwaves across the currency market, leading to further strengthening in the Japanese yuan and other Asian currencies. USD/JPY hit a six-month low of 107.67 and the overall trend remains bearish. Fibonacci Extension suggest its next support level can be found at 107.16 (100%) and then 106.24 (127.2%). USD/SGD has come to a two-month low of 1.361, a key support level. Breaking down this support will open room for more downside towards 1.358 (61.8%) and 1.355 (78.6%) level.
US equity markets finished broadly higher in response to a dovish Fed. Sectorial performance, however, suggest cautious optimism as defensive sectors were leading the gain. Healthcare (+0.96%), utilities (+0.81%) and real estate (+0.68%) were outperforming whereas materials (-0.47%), energy (-0.22%) and financials (-0.21%) were trailing.
Gold prices jumped as much as 2.4% to US$ 1,392 before retracing back to US$ 1,380 this morning. This is the highest price seen in over five years. A shift in the global central bank’s policy guidance is the main driver behind precious metal prices. As more money is created in a prolonged easing cycle, fiat currency circulating in the financial system will gradually depreciate against physical goods. In other words, the eroding purchasing power of paper money has led to a rush into traditional, physical currencies for store of value. Technically, momentum indicators show signs of overbought in the near term, and therefore a technical pullback is possible.
The equities markets will likely extend gain, moderately, on the Fed and upcoming G20 meeting. US and China officers have re-started trade negotiations ahead of the Trump-Xi meeting. A strengthening of offshore Chinese yuan suggests the tension over the US-China trade relationship has somewhat eased, and the worst is perhaps behind us for now.
Today, the BOJ meeting and its interest rate announcement at 10:30am Singapore time is likely to trigger higher volatility in USD/JPY. The central bank is expected to leave the current monetary easing framework unchanged.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.