Fed comments help risky assets rally, Gold unsteady

Headlines

* Lingering inflation risks keep Fed in wait-and-see mode on rate cuts

* S&P 500 higher as stocks rebound from Tuesday sell-off

* Nvidia overtook Google after Amazon recently as third biggest market cap

* GBP underperforms after softer than expected UK inflation data

FX: USD drifted lower after printing a fresh three-month high at 104.97. Bond yields came off after mildly dovish comments from Fed Chair Powell and Chicago Fed President Goolsbee. Powell downplayed Tuesday’s hotter than expected CPI. Goolsbee said even if inflation comes in a bit higher over the next few months, it is still consistent with the Fed’s path back to target. The Fib level (61.8%) of the Q4 sell-off sits at 104.63.

EUR touched a three-month low at 1.0695 before finding a bid. The latest EU Q4 GDP flash estimate was flat and in line with expectations. The Q4 employment data was stronger than expected. EUR/USD has lost support at 1.0725. The 61.8% retrace support of the euro’s Q4 rally is 1.0712.

GBP was the weakest major on the day. Sterling saw weakness after CPI data came in cooler than forecast with the headline maintaining a 4.0% pace, beneath the 4.2% forecast. The core CPI also matched the December pace at 5.1%, missing the 5.2% forecast. Markets see around a 50/50 chance of a rate cut in June. This year’s low in cable is at 1.2518.

USD/JPY consolidated its recent upside move trading around 150.50. We had predictable jawboning from various Japanese officials. Japan intervened in the FX market three times in 2022. That’s when the yen plunged to 32-year lows near 152.

AUD found a bid as risk sentiment made a comeback. Prices are trying to make it back to previous support around 0.65. USD/CAD backed off recent highs on the risk rally. Previous resistance now turns potential support around 1.3540.  

Stocks: US equities rebounded as the benchmark S&P 500 regained 5,000. The broad blue-chip index gained 0.96% to settle at 5,000. The tech-laden Nasdaq 100 added 1.18% to close at 17,807. The Dow Jones closed up 0.40% to settle at 38,424. Industrials and tech led the gains while energy and consumer staples were the only sectors in the red. Lyft and Uber rallied while Nvidia replaced Alphabet as the market’s third most valuable company. It is worth $1.825trn, with focus now on its quarterly results next week.

Asian futures are in the green. APAC stocks fell following US stocks and hot inflation data. The ASX 200 declined with underperformance in the financial sector after CBA reported a drop in H1 profit and warned of financial strain from higher rates. The Hang Seng conformed to the risk-off mood on return from holiday while mainland Chinese markets were closed.

Gold slid further making a fresh low at $1984 before paring losses. Softer yields and modestly dovish Fed comments helped gold bugs.

Day Ahead – Australia Employment, US Retail Sales

Australia jobs are expected to see gains of 27.5k, down from 65.1k in December. Economists say that January is the most seasonal time of year for the labour market. That means one-off factors may overinfluence the data. But the   underlying trend is pointing to a cooling in demand. The jobless rate is forecast to tick one-tenth higher to 4.0%.

US RetailSales are forecast to rise 0.2% m/m, down from the 0.6% December print. Bad weather will be a factor in the decline, along with a post-holiday period hangover. High borrowing costs and lower savings are cited as long- term headwinds. Seasonals still favour the dollar with the next major risk event being the January PCE data released on the last day of this month.

Chart of the Day – Gold breaks down

Gold dropped below $2,000/oz for the first time since December following Tuesday’s stronger-than-expected US inflation report. That hot report further reduced hopes for imminent Fed rate cuts. Higher borrowing costs are typically negative for non-yielding gold.

The precious metal has held above the $2,000 level since mid-December, supported by safe-haven demand amid geopolitical tensions. Expectations that the Fed will start to ease monetary policy this year have also reversed sharply. The outlook for gold will be largely dependent on Fed policy and if the pace of easing for this year is further dialled back. The 50% retrace level of the October-December rally is $1979. The 200-day SMA sits below at $1965.

AUTHOR

Jamie Dutta >

Jamie Dutta is a Market Analyst for Vantage. He comes with extensive experience as a full-time trader and financial market commentator, having worked as a trader in top tier investment banks and trading houses.