16/09/2024 - 07:56 UTCThe US dollar retreated against most of its major peers on Friday, with the dollar index (USDX) hovering close to levels last seen in December 2023. As markets are divided over whether the central bank will cut interest rates by 25 or 50 basis points, expectations lean towards a 50-bp rate cut after comments from former New York Fed President Bill Dudley who stated that rates are currently 150-200 basis points above the so-called neutral rate for the U.S. economy
According to the CME's FedWatch tool, the market is currently pricing in a 59% chance of a 0.25% interest rate reduction by the Federal Reserve in September. A larger cut of 0.5% is seen as less likely at 41%.
Wall Street's primary indices concluded last week with sharp gains, as we enter the start of an easing cycle in the United States with investors flirting with the chance of an outsized rate cut move. The move came despite some high inflation readings last week, buoyed by the acquisition of shares at lower price levels and a renewed surge of enthusiasm surrounding artificial intelligence.
On another note, the geopolitical stage was rattled by a second assassination attempt of former president Donald Trump. The attempt took place outside his golf course in West Palm Beach Florida on Sunday where shots were fired. The incident comes after a previous assassination attempt in Pennsylvania on July 13, which raised concerns about the security measures in place for presidential candidates ahead of the highly anticipated Nov. 5 election.
In other news, a series of economic indicators published by the Chinese government over the weekend revealed that industrial production and retail sales expanded at a slower pace than anticipated in August. At the same time, the unemployment rate increased, and residential property prices declined. These developments have intensified concerns regarding a potential economic downturn within the country.
Monetary policy meetings are scheduled from the Bank of Japan and the Bank of England this week, where no changes to interest rates are anticipated from either. In the US, aside from the long awaited FOMC statement, data on US retail sales and industrial production are due.
EUR/USD briefly surged past the 1.1100 mark on Friday, but renewed market pressures saw the pair retreat to its opening levels by the end of the day.
On Thursday, the European Central Bank (ECB) cut its main refinancing rate from 4.25% to 3.65%, a 60 bps reduction that initially sparked a modest rally for the Euro.
However, this momentum quickly faded as global markets shifted their focus to the Federal Reserve, where expectations for a rate cut are intensifying. According to the CME’s FedWatch Tool, traders are now pricing in a 45% chance of a 50 bps rate cut when the Fed meets on September 18.
With investors jostling for position, EUR/USD’s path forward appears increasingly tied to the outcome of the Fed's rate decision, as rate markets continue to heavily influence global currency movements.
Gold prices surged to a new all-time high on Friday, buoyed by growing expectations of a significant interest rate cut by the Federal Reserve. The non-yielding metal continues to benefit from a weaker US Dollar, with market speculation pointing to a possible climb toward the $3,000 mark.
The shift in rate expectations has put downward pressure on US Treasury yields and weakened the US Dollar.
The latest US economic data also supported the bullish outlook for gold. The University of Michigan’s Consumer Sentiment Index for September showed an improvement from August, while inflation expectations declined.
Oil prices fell on Friday as crude production in the U.S. Gulf of Mexico resumed following the passage of Hurricane Francine, and data showed a weekly rise in the U.S. rig count.
Despite Friday's decline, oil futures ended the week higher, boosted by storm-related price surges earlier in the week, which broke a multi-week losing streak.
Looking ahead, investors are now focused on the U.S. Federal Reserve’s upcoming two-day policy meeting this week, where a rate cut is widely anticipated on Wednesday.
U.S. stock markets closed higher on Friday, as investors focused on the increasing likelihood of a significant interest rate cut by the Federal Reserve this week.
The outlook for the Fed’s decision remains volatile, with expectations for a 50 basis point (bps) rate cut rising to 49% by late Friday, up from 28% the previous day, according to CME’s FedWatch Tool.
In other data, a survey released on Friday showed that U.S. consumer sentiment improved in September, with inflation easing. However, Americans remain cautious ahead of the upcoming presidential election.
In individual stocks, Adobe slid 8.5% after forecasting weaker-than-expected fourth-quarter earnings, and Boeing fell 3.7% after workers at its West Coast factory walked off the job.
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