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The decline in US yields, on Tuesday, boosted gold, which jumped toward $2,020 posting the highest daily close in three weeks. Silver climbed from $24.60 to $25.35. Cryptocurrencies soared, with BTC/USD rising 3.50% to $28,700.
Following a sharp drop in equity prices on Wall Street and significant swings in the FX market, volatility is expected to remain high on Wednesday. Despite First Republic Bank’s acquisition, there are still banking issues because shares of two local banks are falling. The Federal Reserve’s (Fed) decision will be the main event on Wednesday. Market traders are anticipating a rate increase of 25 basis points. The press conference and the statement will be the main topics of discussion.
Despite aversion to risk, the US Dollar Index was unable to hold its gains and fell during the American session. As US Treasury bonds rose, the DXY dropped from three-week highs back below 102.000.
Economic Data
The US 10-year yield dropped more than 4% and settled at 3.42%, while the 2-year fell below 4%. The move started after the release of US data (JOLTS and Durable Goods Orders) amid rising bets of rate cuts from the Fed by the fourth quarter.
Key Developments
During the American session, EUR/USD significantly recovered, rising to 1.1000 from weekly lows below 1.0950. The core inflation rate for the Euro Area in April was 5.6% YoY, slightly exceeding expectations. A rate increase is anticipated when the European Central Bank (ECB) announces its monetary policy decision on Thursday. A 25 bps increase is anticipated, although a 50 bps increase is also conceivable.
Tuesday’s unexpected rate increase by the Reserve Bank of Australia (RBA) strengthened the Australian Dollar and demonstrated that hawkish surprises are still possible as long as inflation stays persistently high. The Australian currency initially outperformed, but later fell and lost gains. AUD/USD briefly soared above 0.6700 before falling to 0.6665. The couple’s prospects improved, although not significantly;
The Canadian dollar lost ground across the board, with USD/CAD rebounding at the 100-day Simple Moving Average at 1.3530 to 1.3630. A 5% drop in crude oil prices weighed on CAD. The gloomy global growth outlook is keeping crude under pressure.
What Is Next?
Early Wednesday, the Reserve Bank of New Zealand will release the Financial Stability Report, followed by the NZ Employment Report. Australia reports Construction and Service PMI, followed by March Retail Sales. The main event of the day will be the Fed decision. Also important will be the ADP Employment Report.
On Wednesday, when the two-day FOMC meeting comes to a finish, the Fed is anticipated to increase the Fed Funds rate by 25 basis points to 5.00% – 5.25%. This would be the same peak rate as in 2007. Projection updates won’t be made. The statement will be the main topic of discussion for the market, followed by Chair Powell’s news conference. ADP’s private employment data will be made available prior to the Fed’s decision.
Any easing by the major central banks, in our opinion, is a 2024 story. Period. In particular, we still think that the Fed’s ability to tighten policy and then maintain it there for a long time is being underestimated by the markets. This should be a huge, huge wakeup call for investors that have become way too complacent about a Fed pivot.
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