High-for-longer rate outlook as takeaway from FOMC meeting: Gold, Copper, US dollar

Market Recap

The conclusion of the June meeting has seen the Federal Reserve (Fed) keeping rates on hold at 5.00%-5.25% in a widely-anticipated move, but there is less conviction for markets that today’s move will mark the end of its tightening campaign.

A hawkish takeaway came from the Federal Open Market Committee (FOMC) dot plot, with peak rate for 2023 revised to 5.6% from the previous 5.1%, which suggests another 50 basis-point (bp) of tightening by the end of this year. Rate forecasts for 2024 and 2025 were revised upwards as well, which seems to put a high-for-longer rate outlook on the horizon. The justification may come on the back of some persistence in inflationary pressures, with the Fed’s core Personal Consumption Expenditures (PCE) forecasts seen higher at 3.9% for 2023 compared to the 3.6% expected in March.

Comments from Fed Chair Jerome Powell seem to add to the hawkish equation, saying that Fed rate cuts are a 'couple years out', at a time when broad market expectations were pricing for rate cuts by the end of the year. With the July meeting being deemed as a ‘live’ meeting from the Fed Chair, it will leave any rate decision to just a handful of inflation and labour data ahead. Current Fed funds futures continue to lean towards a 25 bp move in July, but its pricing for terminal rate at 5.25%-5.5% are still less hawkish than what the Fed has guided, which leaves any further recalibration on watch.

Treasury yields were on a mixed tone, reflecting some indecision in the aftermath of the FOMC meeting. On the other hand, a high-for-longer rate outlook has not been well-received by gold prices, which saw a sharp paring in initial gains overnight. Intermittent bounces over the past one month have failed to find much of a follow-through, with prices hovering back near its two-month low around the US$1,940 level. Any breakdown to a new lower low may be in sight, which could reinforce its near-term downward bias. Its Relative Strength Index (RSI) continues to trend below the key 50 level, while a key trendline support in place since November 2022 has been invalidated, reflecting sellers in control for the present.

Asia Open

Asian stocks look set for a slight positive open, with Nikkei +0.17%, ASX +0.31% and KOSPI +0.30% at the time of writing as market participants continue to digest the latest FOMC meeting. The economic calendar this morning has seen first-quarter gross domestic product (GDP) read from New Zealand dragging the country into a technical recession. A 0.1% decline quarter-on-quarter in 1Q, following a 0.7% decline in 4Q, is likely to provide further justification that the Reserve Bank of New Zealand (RBNZ) is done with tightening, which translates to some downward pressure on the New Zealand dollar.

The day ahead will bring focus to Australia’s employment data, followed by a series of economic data out of China (industrial production, retail sales, fixed asset investment). Recent cuts to China’s short-term borrowing costs may drive hopes of a similar adjustment to the one-year Medium-term Lending Facility (MLF) rate later today, with the upcoming economic data likely to add to the recent series of downside surprises and reinforce a low-for-longer growth outlook in China. All three above-mentioned data are expected to display some moderation in year-on-year growth from April.

Copper prices have managed to recover more than 8% since finding support at the US$7,940/tonne level. A reclaim of the RSI above the 50 level, along with a bullish crossover on moving average convergence/divergence (MACD) may point towards some upward momentum in the near term. That said, immediate resistance still stands at the US$8,600/tonne level for now. Greater conviction for a more sustained upside may have to come from a move above the Ichimoku cloud to signal an upward trend in place. On any downside, the US$8,250/tonne level may bring some support from an upward trendline in confluence with a Fibonacci retracement level.

On the watchlist: Knee-jerk reaction in the US dollar but more signs needed

The FOMC meeting has brought about some volatility in the US dollar overnight, with the release of the dot plot triggering a 0.5% knee-jerk reaction mid-day before some gains were pared during the Fed press conference. Greater conviction for the bulls may have to come from an overturn of the lower-highs-lower-lows formation on the four-hour chart since the start of the month, with immediate resistance to overcome at the 103.12 level.

For now, its RSI has headed below the key 50 level, along with a declining MACD, which calls for the need of a significant build-up in upward momentum to provide some conviction for the bulls as well. Any failure to tap on the hawkish tone from the FOMC meeting for any move higher over subsequent days could point towards ongoing exhaustion, which could place its May bottom in sight for a retest next.

Wednesday: DJIA -0.68%; S&P 500 +0.08%; Nasdaq +0.39%, DAX +0.49%, FTSE +0.10%