Federal Reserve Holds Rates, Leaving Policy Outlook Unclear

The United States (US) dollar (USD) held near recent highs after the Federal Reserve (Fed) kept interest rates unchanged and offered little clarity on its next policy move, while gold fell and oil pared gains as markets weighed inflation pressures against hopes for renewed peace talks.

Market Wrap-Up: Dollar Steadies, Gold Falls, and Oil Retreats

The US dollar steadied on Thursday after the Fed held interest rates in the 3.75%-4.00% range in a 10-2 decision, leaving investors uncertain about the outlook for monetary policy. The central bank upgraded its assessment of economic growth, describing activity as expanding at a “strong pace”, while acknowledging that inflation remained elevated.

Some market participants interpreted Warsh’s press conference as dovish because he offered no clear guidance on the possibility of a December rate increase. Traders also pared back expectations for rate hikes in 2027, with upcoming inflation and employment data likely to influence the policy outlook.

In early Asian trading, the US Dollar Index (DXY) stood at 102.26. The euro fell 0.15% to USD 1.1134, while the dollar rose 0.14% against the Japanese yen to 158.045. US Treasury markets showed a mixed response, with the yield curve steepening after Warsh began speaking. The two-year Treasury yield fell 2.3 basis points to 4.712%, while the 10-year yield rose 4.11 basis points to 5.034%.

Elsewhere in currency markets, the New Zealand dollar stabilised on Thursday at USD 0.5621 after falling as much as 1.7% following the Reserve Bank of New Zealand’s unexpected decision to hold its policy rate at 2.75%. The Australian dollar was last at USD 0.705, near a one-month high, while the Canadian dollar last traded at 1.399 per US dollar after the Bank of Canada raised interest rates for the first time in more than three years.

Gold prices declined on Wednesday as higher oil prices fuelled inflation concerns, while rising longer-term Treasury yields increased the opportunity cost of holding non-yielding bullion. Spot gold fell 0.5% to USD 4,039.39 an ounce, while US gold futures for December delivery settled 0.6% lower at USD 4,051.60.

Oil prices also eased in early Asian trading on Thursday, paring gains from the previous session. Brent crude futures fell 0.7% to USD 114.50 a barrel, while West Texas Intermediate (WTI) crude futures declined 1.0% to USD 101.74. Hopes for renewed peace negotiations between the United States and Iran offset concerns over continued Middle East supply disruptions, although regional hostilities remained a source of uncertainty.

The US Energy Information Administration reported that crude inventories fell by 1.9 million barrels in the week ended 23 October, compared with analysts’ expectations for a 15,000-barrel increase. Gasoline inventories, meanwhile, rose by 3.9 million barrels, against forecasts for a 900,000-barrel decline.

Market attention now turns to the European Central Bank (ECB), which is expected to leave its deposit rate unchanged at 2.5% on Thursday. Markets will assess its guidance on the possibility of a rate increase in December, while French government bond market tensions and uncertainty surrounding President Christine Lagarde’s tenure will also remain in focus.

Meanwhile, US third-quarter Gross Domestic Product (GDP), Personal Consumption Expenditures (PCE) inflation data, and Initial Jobless Claims are due on Thursday. These releases will provide fresh insights into economic growth, inflation, and labour-market conditions, respectively, potentially influencing expectations for the Federal Reserve’s next policy steps.

DXY

Key Takeaways

·         December rate-hike pricing leaves the dollar exposed to any upside surprise in US inflation or employment data.

·         Reduced bets on further 2027 hikes may limit policy-driven dollar support unless incoming data shifts expectations back towards tighter policy.

Technical Outlook

·         Daily Bias: Bearish

·         Support: 101.86

·         Resistance: 102.44

Gold (XAU/USD)

Key Takeaways

·         Higher Treasury yields increase the opportunity cost of holding non-yielding bullion, reinforcing gold’s sensitivity to the interest-rate outlook.

·         A stronger-than-expected PCE reading could reinforce expectations for a December rate increase, adding pressure to gold.

Technical Outlook

·         Daily Bias: Bullish

·         Support: 4,025

·         Resistance: 4,082

WTI Contract for Difference (CFD)

Key Takeaways

·         Renewed diplomacy may curb part of the geopolitical risk premium, but continued attacks leave supply-disruption risks unresolved.

·         The unexpected crude-stock draw contrasts with rising gasoline inventories, leaving different signals across the US petroleum market.

Technical Outlook

·         Daily Bias: Bullish

·         Support: 100.91

·         Resistance: 103.57

Euro/US Dollar (EUR/USD)

Key Takeaways

·         Relative-rate expectations remain the key transmission channel for EUR/USD, with incoming US data and ECB guidance able to shift the balance between the currencies.

·         A clearer ECB signal on December tightening could support the euro, while renewed expectations for Fed hikes could favour the dollar.

Technical Outlook

·         Daily Bias: Bullish

·         Support: 1.11224

·         Resistance: 1.11695

Calendar Watch

·         PCE and Core PCE Price Index, Month-on-Month (MoM) and Year-on-Year (YoY): Measure changes in US consumer prices on a monthly and annual basis, with core PCE excluding food and energy. The figures will provide insights into headline and underlying inflation pressures and could influence expectations for the Federal Reserve’s next policy moves.

·         US Gross Domestic Product (GDP), Quarter-on-Quarter (QoQ): Measures changes in US economic output. The advance estimate for the third quarter will provide insight into economic growth and could influence expectations for the Federal Reserve’s monetary-policy outlook.

·         Initial Jobless Claims: Tracks weekly applications for unemployment benefits, providing a timely indication of labour-market conditions. The figures could influence expectations for employment resilience and the Federal Reserve’s policy outlook.

·         ECB Interest Rate Decision: The European Central Bank is widely expected to keep its deposit rate unchanged at 2.5%. Markets will focus on policymakers’ guidance on a potential December rate increase amid persistent inflation risks and tighter financial conditions.

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