Asian Update – Markets Await Fed, Oil and Gold Higher on 25bps Cut

The US dollar is mixed against major pairs ahead of the end Fed’s FOMC meeting. The Fed is set to deliver the first interest rate cut in 10 years, lowering the benchmark rate by 25 basis points. A deeper cut was slowly priced out as economic fundamentals remains strong.

The spotlight will be on Fed Chair Powell and the answers he gives members of the financial press. Last week ECB President Mario Draghi was thought to not be dovish enough, and the euro rose despite the central bank signalling a rate cut deeper into negative territory.

Central banks around the globe are ready to keep rates lower for longer, and the Fed will lead the charge despite ending its QE program and hiking four times in 2019. Global growth has stalled, and central banks will look at their depleted monetary policy arsenal to gain traction.

EUR/USD Markets Await Fed Decision and Further Guidance

The euro gained 0.11 percent versus the dollar on Tuesday. The single currency is trading at 1.1157 expecting a 25 basis points cut from the Fed. The language in the rate statement and the words from Fed Chief Powell will be the ones guiding the market as the central bank prepares to lower its benchmark rate on Wednesday. The ECB signalled an upcoming rate cut in September, but once again sent mixed signals during the press conference. Mario Draghi will step down in October with Christine Lagarde set to take over the central bank with a lot to do, and little left in monetary policy ammo to do so.

The Fed is the best positioned major central bank as it is not facing a dire slowdown and it has room to adjust its benchmark rate if needed. The pressure for the US central bank has mostly come from internal factors as the White House has campaigned for lower rates and the biggest headwind for the US economy has been the US-China trade war.

The US trade team is in China and while optimism remains muted the fact that talks are happening is good news for growth not only in America but at a global scale, a negative outcome of the trade talks could lead to more growth downgrades around the world.

OIL

Oil prices rose on Tuesday in anticipation of further dollar softness and another drop in US crude inventories. The U.S. Federal Reserve started its July Federal Open Market Committee (FOMC) meeting and will wrap it up tomorrow at 2pm EDT with the release of its rate statement and the press conference by Fed Chair Jerome Powell. The market is fully pricing in a 25 basis points interest rate cut, but t the answers from Powell will weigh more on future dollar pricing as a less dovish outlook could lead to a dollar rebound.

West Texas Intermediate gained 2.06 percent and Brent 1.55 percent as a weaker dollar ahead of the Fed and trade optimism putting less downward pressure on crude. Comments from the White House have hinted that a deal won’t be announced, but the restart of negotiations could eventually lead to a positive outcome.

The tension in the Middle East continues to rise as the US wants to form an alliance with Germany, France and the UK to safeguard the passage of oil tankers through the Strait of Hormuz.

GOLD

Gold rose 1.65 percent on Tuesday ahead of the end of the Fed’s FOMC meeting on Wednesday. The heavily anticipated interest rate cut by the Fed is already priced into the value of gold, but there is still plenty of speculation on how dovish Fed Chair Powell will be during his press conference. Economic indicators in the US have remained solid, although there are small signs of the economy losing momentum but given the global growth forecasts it could lead to the Fed having to do go back to a patient stance despite the pressure from the White House.

Gold will look for direction in the tone of the Fed Chief’s rhetoric. More dovish could lead to a weaker dollar and a higher price for gold, but neutral to hawkish comments on the economy could lead to a rebound in the dollar putting downward pressure on the metal.