Cooling US inflation provides room for Fed’s wait-and-see: Silver, Hang Seng Index, GBP/USD

Market Recap

Major US indices continue to add to recent gains overnight (DJIA +0.43%; S&P 500 +0.69%; Nasdaq +0.83%), as further cooling in US inflation reflects some degree of success in policy moves thus far and provides room for the Federal Reserve (Fed) to put on some wait-and-see at the upcoming Federal Open Market Committee (FOMC) meeting. An almost-certain 90% probability that rates will be put on hold this week is being priced by the Fed Funds futures, although expectations still largely lean towards a 25 basis-point (bp) upward adjustment in rates in July.

A 0.4% increase in core inflation from the previous month may be the reason behind it by pointing to some lingering prices’ stickiness. But nevertheless, the broader trend of moderating inflation suggests that we are still heading towards the final phase of the Fed’s tightening cycle, with one-off policy tweaks at best.

With expectations largely priced for a rate-pause scenario, more focus will be policymakers’ guidance and the fresh economic projections to determine what comes next. A more data-dependent stance and wordings around policy flexibility from the Fed may be looked upon as less hawkish. On the other hand, if terminal rate projection were to be revised higher alongside inflation estimates, it could paint a high-for-longer rate outlook and reignite hawkish concerns.

US Treasury yields were broadly higher, with the two-year yields delivering a new three-month high despite an initial decline. The rise in both nominal and real US yields kept the downward pressure on gold and silver prices overnight. Following an initial move higher, gains in silver prices were quickly pared through the day, with the formation of a long-tailed bearish candle pointing to the strong presence of sellers. Prices are struggling to hold above a near-term rising channel pattern for now, with any failure to defend the lower channel trendline support potentially paving the way towards its May 2023 low.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.75%, ASX +0.32% and KOSPI +0.03% at the time of writing. A surprise cut in China’s short-term policy interest rate suggests that recent economic weakness is turning more of a concern for Chinese authorities, which may pave the way for more policy moves to come, with all eyes on the one-year medium-term lending facility (MLF) rate this Thursday. While a further dip into accommodative policies may be welcomed by investors, upside reaction could still remain more tepid, with clearer indications of policy success on the lookout to provide greater conviction on a sustained recovery.

Having traded on a descending wedge pattern since the start of the year, the Hang Seng Index is back to retest the upper trendline resistance, with a 9% gain month-to-date gain building on hopes that further support stimulus will kick in to lift growth. That said, a series of resistance remains in the way to drive the risks of the formation of a lower high, with the 19,600 level serving as immediate resistance to overcome. Much awaits, with the Relative Strength Index (RSI) crossing back above the key 50 level but sustaining above it will be key for now to keep buyers in control.

On the watchlist: GBP/USD at one-month high as hawkish bets mount

Surprise strength in the UK job numbers has translated into gains in the GBP/USD overnight, as rate expectations for the Bank of England (BoE) recalibrated to price for more rate hikes from the central bank over subsequent meetings. A higher-for-longer rate outlook is the takeaway, with some pricing that rate could end at 6% by the end of this year, which is another 150 basis-point increase from the current 4.5%. This was followed by comments from the BoE Governor Andrew Bailey pointing to more sticky inflation, which reinforces the need that more needs to be done.

The GBP/USD has pushed to a new one-month high overnight, with a bullish crossover on moving average convergence/divergence (MACD) and its RSI trending above the key 50 level pointing to an upward bias for now. The pair has been trading within an ascending wedge pattern since October last year, with further upside potentially leaving the upper wedge trendline at the 1.276 level on watch for a retest. Ahead, focus will shift towards the FOMC meeting, which leaves any moves in the US dollar as greater catalyst in driving the pair. Near-term support may be at the 1.248 level, where the lower wedge trendline stands.

Tuesday: DJIA +0.43%; S&P 500 +0.69%; Nasdaq +0.83%, DAX +0.83%, FTSE +0.32%