The FOMC meeting dominated proceedings in financial markets this week, and from the perspective of risk assets, it was a case of good news/bad news. The good news was that the Fed doesn’t appear to be leaning towards a potential hike, despite a run of stronger macro indicators (including some which measure inflation). The bad news was that there doesn’t appear to be any near-term rate cut in sight. However, the Fed will start to reduce some of its Quantitative Tightening measures via balance sheet reduction.
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The initial big takeaway from the Fed meeting is that a potential rate hike isn’t on the cards according to Jerome Powell, and this is what drove market reaction. With the spectre of a possible hike fading, the USD and bond yields eased moderately. The Dollar Index (DXY) eased around 0.2% although it is still within sight of its recent highs thanks to there being no hint of an imminent rate cut from the FOMC meeting.
The USDJPY rate has been like a yo-yo this week with all signs pointing towards intervention occurring on behalf of the beleaguered yen. The 160 level seems to be the level which causes the most agitation amongst Japanese authorities, and their resolve to defend this level could be further tested by yen bears in the coming days and weeks. Particularly if we see a rebound in treasury yields which could boost the USD. Japanese authorities may well be crossing their fingers and hoping for a softer US non-farm payrolls print this Friday.
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The pullback in the USD and bond yields (following the FOMC meeting) suited the gold price nicely, with the precious metal moving back above the $2300 level. While the initial focal point of the FOMC meeting for investors was that a potential rate hike doesn’t appear to be on the radar, if attention shifts towards the other outcome of the meeting which is that interest rate relief also seems some way off in the distance, the USD and bond yields could resume their upward path which would create a headwind for the gold price. The next level of resistance for gold to clear on the upside is at $2326, while support lies at $2284 on the low side.
Elsewhere, oil prices dipped on rising US stockpiles and a proposed ceasefire between Israel and Hamas. The WTI contract slipped below the $80 level having fallen more than 3%. If there are no new developments regarding a ceasefire it is feasible that we could see prices rebound and supply concerns resume. But for the time being, excess capacity as indicated by the climb in US stockpiles is keeping a lid on the oil price.
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While the May FOMC meeting is now in the books, there is a still a key event risk to come this week in the form of NFP (Non-farm Payrolls). Jobs growth of around 238k for the month of April is expected. Over the past two years, the trend has been for US jobs figures to beat expectations and any continuation of this could further push out the expected timeline for rate cuts from the Fed. As such, all eyes will be on the latest jobs data in the US as markets continue to speculate when that first rate-cut may finally arrive.
