USD falters as the Fed signals the end to its rate hikes
- One final hike by the Fed: A final +25bps hike but now on pause, with markets pricing for rate cuts later in the year.
- USD falling: The USD is underperforming again on major forex
- Equities also under pressure: European indices play catch up on Wall Street declines, with US futures trying to find support
- Metals unwind gains, oil trying for support: In commodities, gold is unwinding a spike to all-time highs, with oil rebounding this morning after losses.
One and done from the Fed
The Federal Reserve has unanimously hiked the Fed Funds rate by 25 basis points, taking the range to 5.00%/5.25%.
However, this seems to be the last hike of the cycle.
The changes in language in the statement and the concerns that Fed Chair Powell discussed in the press conference are leaving markets to price ever more confidently for rate cuts later in the year.
The statement changes that mean the Fed is done
The Fed has hiked for the last time.
They know that the wording of the communication in the statement is all-important.
The section that says “some additional policy tightening may be appropriate” has gone.
It now talks about the hurdles that would effectively prevent further tightening, including the impact of tightening and the lags on economic activity and inflation, but also “economic and financial developments”.
Here is the section now:
In his press conference, Fed Chair Powell also said three very important words:
“Policy is tight”
This is key for markets as it signals that there is little need to continue hiking from here.
Attention turns to when rate cuts might begin
The “financial developments” do not look great.
A third US bank (First Republic) failed in recent days, whilst news reports suggested that another bank (Pacific Western Bank) is considering its strategic options as its shares fell by over 50% yesterday.
The US economy is also experiencing a deterioration in “economic developments” too.
Consumer confidence is faltering, whilst the labour market is creaking and as the Fed has already suggested, a “mild recession” could be on the cards.
So markets are looking at when the Fed could cut interest rates.
History suggests that the gap between the last rate hike and the first rate cut tends to be around six months.
That leaves November as a realistic moment for a first cut.
However, markets are already testing the Fed on this view, as the Fed Funds futures curve suggests today.
There are more than 50bps of rate cuts now priced in by the year-end.
Looking at the CME Group FedWatch tool, the suggestion is that there is an 85% probability of a first rate cut in September.
The next meeting in June will contain the updated dot plots and economic projections.
This will be seen as an important gauge for the coming months.
USD falls, Gold is volatile
The USD has suffered selling pressure on major forex and continues to eye key levels that if breached would open the next leg of weakness.
There has also been a big spike higher in gold, to all-time highs, although this is now unwinding this morning.
The big run back higher seen on the Fed decision yesterday completed a strong bullish candle.
However, a key barrier of resistance between 1.1075/1.1095 is yet to be breached.
We have seen another move to test this resistance this morning, but yet again it is holding firm.
Interestingly, the RSI momentum is not calling for an upside break for now, but any move into the mid-60s would be a bullish signal.
A close above 1.1095 would open the upside towards a test of the next resistance at 1.1185.
As the market has pulled back this morning, the initial support at 1.1036 which if broken would have unwound all of the post-Fed move.
Another key move has been seen in Gold.
An upside move accelerated overnight and the price moved above the old all-time high of $2075 to hit a peak of $2078 during Asian trading hours.
However, the price has since unwound sharply.
The decline is to such an extent that currently there is a significant bull failure candlestick forming (possibly a shooting star if it closes around current levels).
This will be one to keep an eye on with the ECB meeting later too, there could be more volatility to come.
Technically, a shooting star would cloud a strong positive outlook and could drag the price back towards previous breakout support between $2005/$2015.
Support and resistance levels for Forex, Commodities, and Futures/Indices
|Brent Crude Oil
|S&P 500 futures
|FTSE 100 Index
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