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Dovish-sounding Fed and Powell boosts stocks and gold

Vantage Updated Updated Wed, 2024 March 20 09:21


* FOMC still pencil in three rate cuts in 2024, neutral rate moved higher

* BoJ seen weighing next hike in July or October, USD/JPY above 151

* BoE expected to remain in holding pattern until summer

* S&P 500 breaks above 5,200 for the first time after near-term Dovish Fed

FX: USD fell after the FOMC statement, and having retraced into the press conference, dropped again while Fed Chair Powell was answering questions. The Fed funds target rate range was left unchanged for 2024 with three 25bps rate cuts. That was marginally dovish, but GDP and inflation projections were revised higher. So too was the median dot plot for 2025 and the neutral rate. That suggests rates may need to stay higher for longer in the medium term. But in the meantime, Powell is keen to cut rates when the Fed have more confidence and looked through the recent hot CPI data, which were put down to seasonal factors. The DXY has dropped below its 200-day SMA is at 103.62.

EUR bounced strongly off the 200-day SMA at 1.0839 and closed near its highs above 1.09. President Lagarde said the ECB needs more evidence inflation is receding. The bank may have that data by June which could then point to a rate cut.

GBP fell below 1.27 before finishing strongly above 1.2780. UK headline and core CPI came in below estimates. But services inflation was a tenth higher than expectations at a still sticky 6.1%.  Money markets remain set on an August rate cut. Eyes are on the BoE meeting later today. Support is around 1.27 and the recent top at 1.2894.

USD/JPY bullish momentum continued initially pushing up to a high at 151.81. The Fed meeting saw gains retrace but the major remained above 151. The February peak is at 150.88. We are nearing intervention territory, but the MoF have been quiet so far, even on with any jawboning. The major is a yield differential play. With Fed rates at 5.25-5.50%, a BoJ hike from -0.1% to 0-0.1% doesn’t close the yield gap in a major way. Even considering the forward pricing for BoJ, only about 40bps of additional tightening is priced in for the next two years. That is very modest and will keep the pair elevated until it narrows.

AUD jumped up through the 50-day and 200-day SMAs at 0.6557/66. Employment data is expected to see solid job gains of 30k, a rebound from January’s tiny add due to seasonal issues.   USD/CAD dipped to its 50-day and 200-day SMAs at 1.3483/89. Markets more or less fully priced in a June rate cut after the soft CPI data. Seasonal trends tend to be positive for the loonie in Q2.

Stocks: US equities closed higher with record highs in the Dow and S&P 500. The broad-based benchmark S&P 500 closed 0.89% higher to 5224. The tech-laden Nasdaq 100 added 1.15% to finish at 18,240. The Dow Jones settled 1.03% up at 39,512. It was the biggest one-day percentage point and gain on the S&P 500 in over four weeks. The Fed effectively bolstered the view that it would cut rates three times this year. Upward revisions to GDP also continued to support stocks, defying the current restrictive stance.

Asian futures are in the green. APAC stocks traded cautiously on Wednesday and were generally rangebound ahead of the Fed meeting. Japanese markets were closed. The ASX 200 was muted as strength in energy battled with tech and consumer losses. Earnings releases affected Shanghai with Gucci owner Kerring causing losses in other luxury goods stocks.

Gold is still just about consolidating and above the previous long-term high from December at $2148. The combined net long in gold now exceeds the combined long in WTI and Brent crude oil. Attention turns to the Fed, dot plots and Chair Powell’s press conference.

Day Ahead – BoE Meeting and PMIs

The Bank of England meeting is not expected to spring many surprises. We might see another three-way split vote. The base rate will be kept unchanged at 5.25% and the statement language may see few changes. Rates are likely to be needed to remain restrictive for a sufficiently long over a prolonged period of time. More evidence is needed to see inflation on a sustainable path back to the bank’s 2% target. Headline inflation is forecast to drop quite sharply in the coming months. But wage growth and services inflation could stay sticky if the economy continues to perk up. Those two measures need to fall so are key for any talk on rate cuts.

Global PMI data will give us a heads-up on how economies are faring head into the second quarter of 2024. Manufacturing figures are likely to tick up, though generally remain below the 50 level denoting continued contraction. On the other hand, services are more positive and seen bouncing further above the boom/bust mark.

Chart of the Day – EUR/GBP hovers above long-term support

There have been numerous ECB speakers this week who appear to be coalescing around a possible June rate cut. President Lagarde yesterday acknowledged that there were risks with waiting too long to reduce interest rates. She also stated that there should be enough data by June to raise confidence for policy action. The PMIs are expected to show more stabilisation in the region’s economy with further improvement in the metrics.

Sentiment is also improving in the UK with the BoE not priced to cut rates until August. EUR/GBP dipped twice in mid-February and mid-March to strong long-term support around 0.85. Prices are back trading around the 50-day SMA at 0.8543 waiting for the next catalyst. A more hawkish BoE should see the pair retest the support zone below.