TREX Global:Powell's "dovish" raises interest rates, and gold prices point to 2000 again?

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The Fed raised interest rates by 25 basis points as scheduled, but Powell's words were slightly dovish

The Fed raised its benchmark interest rate by 25 basis points on Wednesday, but still pledged to "continue to raise" borrowing costs as part of its unfinished battle against inflation.

"Inflation has eased but remains elevated," the Fed said in a statement, marking a clear acknowledgment of progress in efforts to curb inflation, which has pulled back from 40-year highs hit last year.

Factors such as Russia's war in Ukraine continued to add to "global uncertainty," the Fed said. But policymakers dropped language from previous statements that cited the Russia-Ukraine war and the coronavirus pandemic as immediate causes of the price rise, and made no mention of the global health crisis that began in March 2020 for the first time since March 2020 .

Still, the Fed said the U.S. economy is growing "moderately" with "strong" job growth and that policymakers remain "highly focused" on inflation risks.

U.S. interest rate futures keep bets on terminal rates below 5% after Fed decision

Futures markets tied to the Fed's policy rate are maintaining their bets that the federal funds rate will peak at just below 5% this June, according to Refinitiv FedWatch data on Wednesday, and still expect the Fed to cut rates by the end of 2023.

The US interest rate futures market has priced in a terminal rate of 4.893%. Fed policymakers, on the other hand, are expected to raise the target range for the benchmark policy rate to 5% to 5.25% and keep it there at least through the end of the year.

Meanwhile, the futures market is pricing in a rate cut this year, with the December 2023 federal funds rate at 4.51%.

U.S. manufacturing activity falls further in January

Since March last year, the Fed has raised the policy rate target range by 450 basis points, from near zero to 4.5%-4.75%, the fastest rate hike cycle since the 1980s. Aggressive monetary policy tightening has economists predicting a recession by the second half of the year. The housing market is already in decline, and the manufacturing downturn is deepening.

A report on Wednesday from the Institute for Supply Management (ISM) showed that the U.S. manufacturing purchasing managers' index (PMI) fell to 47.4 in January from 48.4 in December. It contracted for the third straight month, hitting its lowest level since May 2020 and below the 48.7 mark seen as consistent with a broader recession.

U.S. ADP data underperforms

The report showed that private payrolls increased by 106,000 jobs in January, well below economists' expectations for an increase of 178,000 jobs and following a gain of 253,000 jobs in December. However, the ADP National Employment Report attributed the weaker-than-expected private job growth to severe weather in mid-January, including flooding in California

Leisure/hospitality jobs rose by 95,000 in December, which economists said was at odds with bad weather hampering hiring.

Dollar tumbles to nine-month low

The U.S. dollar fell 0.93% on Wednesday, and continued its decline during the Asian session on Thursday, hitting a new low of 100.80 since April 25. Federal Reserve Chairman Powell's remarks were slightly dovish, weakening expectations for tightening policies.

U.S. bond yields fell sharply, the market believes that the Fed has turned dovish

U.S. Treasury yields mostly fell on Wednesday after the Federal Reserve raised interest rates by 25 basis points, as expected, and pledged to "continue raising" borrowing costs to slow the pace of inflation. But the market insisted that the Fed turned dovish.

The Fed raised its target range for its benchmark overnight lending rate to 4.5% to 4.75%, as expected. But the Fed's statement ran counter to investor expectations that the central bank was ready to signal the end of the tightening cycle. The market buys that view because higher interest rates are slowing the U.S. economy.

U.S. job vacancies unexpectedly rise to five-month high in December

U.S. job vacancies unexpectedly rose in December, suggesting strong demand for labor despite rising interest rates and growing recession fears could keep the Fed on the path of policy tightening.

The Labor Department's monthly Job Openings and Labor Turnover Survey (JOLTS) report released Wednesday showed that there were 1.9 job vacancies for every unemployed person in December. Signs of persistent labor tensions haven't changed the Fed's slow pace of rate hikes.

TREX Global’s view:The unexpected dovishness of the chairman of the Federal Reserve, the poor ADP and ISM manufacturing PMI data have significantly dragged down the US dollar and US bond yields, which provided a strong upward momentum for gold prices, and there is still a certain chance for gold prices to rise in the short term. However, before the non-agricultural data, there is still some wait-and-see sentiment in the market. The Bank of England and the European Central Bank are likely to raise interest rates by 50 basis points each, which may also make the bulls scruples. Short-term gold prices are still likely to fluctuate at a high level. In view of the top signal on the technical side, we also need to beware of the possibility of a short counterattack.

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