The dollar index tumbled over 0.6% overnight, following a dovish outlook given by the US central bank in the Federal Open Market Committee (FOMC) meeting just a couple of hours ago.
Fed chairman Jerome Powell has removed ‘patient’ in his statement and underscored ‘uncertainties’ in economic conditions that will increase the case for a rate cut amid a tepid inflation outlook. The policy rate was kept unchanged at 2.25-2.50% at the June meeting, and the expectation for a July rate cut has now surged to 100% percent, from 88% seen a day ago.
The dovish Fed sent heatwaves across the currency market, leading to further strengthening in the Japanese yuan and other Asian currencies. USD/JPY hit a six-month low of 107.67 and the overall trend remains bearish. Fibonacci Extension suggest its next support level can be found at 107.16 (100%) and then 106.24 (127.2%). USD/SGD has come to a two-month low of 1.361, a key support level. Breaking down this support will open room for more downside towards 1.358 (61.8%) and 1.355 (78.6%) level.
US equity markets finished broadly higher in response to a dovish Fed. Sectorial performance, however, suggest cautious optimism as defensive sectors were leading the gain. Healthcare (+0.96%), utilities (+0.81%) and real estate (+0.68%) were outperforming whereas materials (-0.47%), energy (-0.22%) and financials (-0.21%) were trailing.
Gold prices jumped as much as 2.4% to US$ 1,392 before retracing back to US$ 1,380 this morning. This is the highest price seen in over five years. A shift in the global central bank’s policy guidance is the main driver behind precious metal prices. As more money is created in a prolonged easing cycle, fiat currency circulating in the financial system will gradually depreciate against physical goods. In other words, the eroding purchasing power of paper money has led to a rush into traditional, physical currencies for store of value. Technically, momentum indicators show signs of overbought in the near term, and therefore a technical pullback is possible.
The equities markets will likely extend gain, moderately, on the Fed and upcoming G20 meeting. US and China officers have re-started trade negotiations ahead of the Trump-Xi meeting. A strengthening of offshore Chinese yuan suggests the tension over the US-China trade relationship has somewhat eased, and the worst is perhaps behind us for now.
Today, the BOJ meeting and its interest rate announcement at 10:30am Singapore time is likely to trigger higher volatility in USD/JPY. The central bank is expected to leave the current monetary easing framework unchanged.
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