Markets digest Fed decision; BoE and BoJ stand pat

Dollar tumbles on bets of more aggressive Fed rate cuts - BoE keeps rates steady, reiterating cation about future cuts - BoJ stands pat, Ueda says more rate hikes are coming - S&P 500, Dow Jones and gold hit new record highs
XM Group | 289 days ago
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Fed outcome allows risk-on trading

The dollar tumbled against all but two of its major counterparts on Thursday, with the main gainers being the risk-linked currencies, the aussie and the kiwi. The greenback gained some ground versus the safe havens, the yen and the franc.

This combined with the rally in the stock market suggests elevated risk appetite after the Fed lowered interest rates by 50bps, signaled that another 50bps worth of cuts may be warranted by the end of the year, but also expressed no concerns about the state of the US economy.

The dovish outcome allowed market participants to pencil in another 72bps worth of rate cuts by the end of the year, with the scenario of another double cut being delivered in November receiving a 40% chance.

With that in mind and with other major central banks seen cutting rates at a slower pace than the Fed, the greenback may stay on the back foot until data suggests that there is no need for the Fed to continue cutting aggressively.

Cautious BoE leaves rates unchanged

Apart from the greenback’s weakness, the pound benefited from the Bank of England decision as well. Policymakers of this Bank decided to keep interest rates unchanged at 5.0%, with only one member voting for a reduction. Officials noted that they will be careful about future rate cuts, corroborating expectations of a much slower easing strategy than the Fed's.

From being fully priced in, a quarter-point rate cut at the November gathering is now receiving a 75% probability, with investors expecting around 40bps worth of reductions by the end of the year. Should incoming data point to further stickiness in UK inflation, that number may drop more, allowing the pound to continue marching north.

BoJ stays on hold but sees more hikes

During the Asian session Friday, the Bank of Japan decided to stay sidelined as well, revising up its assessment on consumption as wages are growing. At the press conference, Governor Ueda said that recent data suggests they could raise their outlook on underlying inflation and that they will keep raising rates if the economy moves in line with their outlook.

This allowed market participants to continue seeing a strong likelihood of another 10bps rate hike this year, though the risk-on environment did not allow the yen to enjoy any gains.

Stocks enter uncharted territory, new record for gold as well

On Wall Street, both the Dow Jones and the S&P 500 climbed to new record highs, with the Nasdaq gaining around 2.50%. It seems that the Fed decision allowed investors to add to their risk exposure, as easing concerns about the US economy and expectations of more rate cuts soon create a cocktail that is highly favorable for equities.

Gold also marched to record highs aided not only by Fed rate cut bets, but also by a surge in demand among Indian consumers for gold jewelry and bars following a recent decision by the Indian government to reduce import tariffs.

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