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Gold finished flat around $1,940, looking weak. Earlier, the yellow metal peaked at $1,960 but dropped after the FOMC rate decision. Silver rose 1% and finished slightly below $24.00. Cryptocurrencies tumbled late on Wednesday, with BTC/USD falling more than 3% and briefly to below the $25,000 level; namely the $24,927.80 low before rebounding to $25,125 at the time of writing.
Key Developments
The Federal Reserve, as mostly expected, kept its interest rate unchanged. However, it delivered a hawkish message, signaling that rate hikes are not yet done. During the press conference, Chair Powell made it clear by saying that the July meeting will be a ‘live meeting’. In the projections, none of the members considered that a rate cut by the end of 2023 would be appropriate.
Next FOMC meeting will be on July 26. We expect that the continued resilience of the economy and the elevated rate of inflation will lead the Committee to hike by another 25 bps at that meeting.
We then look for the Committee to remain on hold for the remainder of the year. However, given today’s dot plot, we readily acknowledge that the risks to our fed funds forecast are skewed to the upside. We think it will take a modest recession early next year, which will help to bring inflation lower, to induce the FOMC to ease policy.
US yields spiked after the statement and then pulled back. The US Dollar gained momentum after the decision and trimmed losses. The DXY finished the day with a 0.30% loss, posting its lowest close in a month, but off its lows.
EUR/USD broke above 1.0800 and climbed to 1.0863, the highest level in almost a month, before pulling back. The short-term trend is up. The European Central Bank (ECB) will announce its monetary policy decision at 12:15 GMT. A 25 basis point hike is priced in. The focus will be on the language and the forward guidance. Lagarde (12:45 GMT) will probably reiterate that they are not done raising rates.
USD/CHF reached the lowest level in four weeks at 0.8963, but then rose back above 0.9000. The pair is moving with a bearish bias, but losses are limited while above 0.9000. Switzerland will report wholesale inflation, and the State Secretariat for Economic Affairs will release its economic forecasts.
USD/JPY continues to trade in the familiar range between 140.40 and 138.80. Late during the American session, the Dollar regained 140.00. Japan will report trade data, machinery orders, and the Tertiary Industry Index. The Bank of Japan (BoJ) will announce its decision on Friday.
China will release House Price data, Industrial Production, and Retail Sales. A slowdown is expected across the board. Market participants are expecting more stimulus from Chinese policymakers.
AUD/USD rose for the fifth consecutive day. However, it still struggles to hold above 0.6800. The bias is to the upside. The Melbourne Institute will release its inflation expectations for the next 12 months, which are expected to decline from 5.0% to 4.8%. Australia will report May jobs data on Thursday. Employment is expected to rise by 15,000, and the unemployment rate is expected to remain at 3.7%. The Reserve Bank of Australia (RBA) will present its Q1 Bulletin.
USD/CAD rose marginally, rebounding after hitting fresh monthly lows. The rebound above 1.3300 could point to a bullish correction ahead. The Loonie lagged on Wednesday as crude oil prices retreated.
Economic Data
Earlier on Wednesday, more inflation data from the US came in below expectations. The Producer Price Index (PPI) dropped 0.3% in May, and the year-on-year rate slowed from 2.3% to 1.1%, below the consensus of 1.5%. On Thursday, the US will report Retail Sales, the Philly Fed, Jobless Claims, and Industrial Production. Economic data may have a greater influence after the June FOMC meeting.
Data released on Wednesday shows that the Wholesale Price Index in Germany dropped 1.1% in May, and the annual rate stood at -1.1%. A different report showed that Industrial Production expanded 1% in April in the Eurozone, above the 0.8% expected.
More data from the UK was released on Wednesday, adding to the upbeat labor market report on Tuesday. GDP expanded 0.2% in April. However, Manufacturing Production contracted 0.3% in April, against expectations of a 0.2% slide. Next week is the Bank of England meeting, and a rate hike is expected as inflation remains above 9%. GBP/USD posted its highest daily close in a year as the pound continues to outperform. After approaching 1.2700, the pair pulled back to 1.2650.
What to watch on Thursday?
After a busy day with the FOMC meeting, markets are getting prepared for another busy day ahead. During the Asian session, New Zealand will report Q1 GDP, Japan will release Machinery Orders data, Australia will release Consumer Inflation Expectations and Employment data, and China will release Industrial Production and Retail Sales. All these numbers should contribute to keeping volatility elevated. Later on in the day, the European Central Bank will announce its decision and the US will report Retail Sales and Industrial Production.
Also Read:
WTI dropped post-FOMC decision
How has Fed’s Powell explained decision to leave policy rate steady in June?
Powell: Fed projections are not a plan or decision
Breaking: Fed leaves interest rate unchanged at 5-5.25% as expected
