Financial markets are remaining upbeat even as the much-anticipated July FOMC meeting looms large, with the Dow continuing its purple patch in racking up a twelfth daily gain on the trot. This momentum on equity markets suggests that traders are not expecting too many curveballs from the Fed this week, but there remains a risk that Jerome Powell could maintain a more hawkish slant than markets would like.
Yes, inflation is moving in the right direction but with the labor market remaining tight the Fed Chairman will likely want to keep all options open for further tightening…just in case. But to what extent will the Fed emphasize the possibility of further tightening after this meeting? This is what will determine whether the good times keep rolling for risk assets.
With a 25bp hike an assumed outcome of the FOMC meeting, the DXY and gold have been trading in rangebound fashion this week as we await further monetary policy guidance. The language used by the Fed will go a long way towards determining whether the USD downtrend resumes. If Chairman Powell happens to an inkling that the interest rate summit may have been reached, this would spell good news for the gold price which has been ramping up in recent weeks on a lowered US yield outlook. It will all come down to the messaging from the Fed regarding where they see rates going from here…and risk assets will take their cues accordingly.
Meanwhile, softer Australian CPI data today sent the Aussie Dollar lower. June quarter inflation came in at 6%, compared to 6.2% expected and 7% for the March quarter. The CPI data today will be a pleasing result for policymakers as it should justify the case for extending the interest rate pause when the RBA meets next month. Naturally, the AUD initially dived lower on the figures before staging a modest recovery.
Much like on the Dow, the only way has been up for the oil price of late. Positive sentiment on equities, hopes of Chinese stimulus and supply side constraints have put crude in a good stead. The WTI contract is knocking on the door of the US$80 per barrel mark despite technical indicators showing signs of overbought conditions.
Whether assets like oil, gold and equities can continue marching higher will hinge on the rhetoric we hear from the FOMC. If financial markets come out of the Fed event thinking we are at the interest rate peak, then further gains are on the cards. If not, a pullback could be in order. Market shave been positioning for this to be the last rate hike of the cycle, however it remains to be seen if the FOMC has other ideas.