The USD upswing remains intact in the aftermath of last week’s bumper NFP (Non-farm Payrolls) result. The upbeat May jobs data showed that the April NFP miss was perhaps just a blip, and with a tight labour market likely to extend the Fed’s pause on rates the DXY (Dollar Index) is trading above the 105 level. Which is a far cry from the 101 handle it began 2024 on, when rate-cut expectations were high. But how things have changed. Markets began the year hoping for a Q1 or Q2 rate cut from the Fed but now, thanks to stubborn CPI and a tight jobs market, it’s now looking like that wait for interest rate relief may have to wait until closer to the end of the year.
There are two big events which traders have circled on the economic calendar this week which have the potential to swing the balance one way or the other between a possible September or November rate cut, namely May’s CPI data and the June FOMC meeting. Expectations are that US CPI will be hanging around the 3.4% level (on an annual basis), though there will be great interest in what direction the core rate is heading. As for the FOMC, with the labour market not appearing to be slowing down and CPI seemingly reluctant to budge from current levels, the familiar message of patience on the rates front is likely to be preached by Jerome Powell this week. While a reigning-in of projected rate-cuts for the remainder of 2024 (on the ‘Dot Plot’) seems a likely occurrence.
A resolute Fed in regard to keeping rates high will likely keep the USD treading higher, with the greenback likely to maintain or event extend its current yield advantage with other central banks having started (i.e. Sweden, Switzerland, Canada, Europe) or possibly soon to enter the rate cutting phase (Bank of England, perhaps).
With the USD riding high, gold is effectively trying to swim against the tide and the result is that upside gains of any significance are proving hard to come by. The strong greenback is making gold more expensive for foreign investors, while signs that China has hit the pause button on gold purchases have also taken away some momentum from the precious metal. While China did take a break from gold in May, I don’t believe that the PBoC are finished with their diversification efforts away from the USD, so it may just be a case that the Chinese central bank will be more of a ‘selective buyer’ of gold moving forward (by looking for more favourable entry points). Let’s see how this plays out in coming months.
Gold was seen trading around the $2316 on Wednesday. The tone of the Fed this week could provide a stern test of resistance circa the $2300 level depending on the extent of any hawkish tilt from Jerome Powell at his press conference. Further down, support awaits at $2285 and $2271, while on the topside resistance sits at $2342.
Oil has staged a recovery effort following last week’s decline, with the crude price now more or less at the level it was prior to the OPEC+ meeting. OPEC have released their demand forecasts and the carrel seem quite upbeat about the outlook for oil, which has aided the price. US crude oil inventory data this week will be one to watch and could create some mid-week volatility for the energy market.
Overall, risk-assets will take their cues from the Fed rhetoric this week, which in addition to the CPI data could tip the balance between a possible September or November rate cut. Any bringing forward of the timeline for rate relief would suit equities, gold and oil, whilst on the flip side any extension could see the USD and bond yields marching higher.
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