By Ahmad Assiri, Research Strategist at Pepperstone
A busy week is unfolding with five of the world’s ten largest central banks announcing policy decisions, moves that ripple across assets not only because the Fed is poised for its first rate cut since December but also the decision is tied to broader political and institutional dynamics as these dimensions increasingly shape investor confidence in the coming months.
In the US, equities closed on a mixed note. SPX edged down 0.1%, while the Nasdaq drifted sideways with a slight downside bias reflecting a market firmly in muted mode ahead of today’s heavy data flow. The underlying upward trajectory has not vanished but has instead run into the barrier of anticipation particularly around the Fed’s decision and the updated Summary of Economic Projections SEP. Short-term trading sentiment remains cautious, but markets have not shown fundamental weakness. The resilience suggests confidence that Chair Powell will deliver a dovish tone. The near-term risk, however, lies in the extent of that dovishness as markets have priced a deep easing path, leaving them vulnerable to disappointment if the Fed underdelivers.
In the fixed income space, the 10-year yield fell toward 4.03% while the 2-year yield declined but firmly above 3.5%. The steeper curve signals markets are preparing for more than a token September move with cumulative cuts of up to 75 basis points priced in by year-end. Still, concerns about fiscal sustainability and deficits persist helping explain why investors are diversifying into gold as a hedge against curve risk and fixed income fragility particularly in the long end.
DXY slid to 97.3, its weakest since July, underpinning gains in the euro and sterling. This dollar softness is not solely about rate cut expectations. Questions over Fed independence are resurfacing following the razor-thin Senate confirmation of Stephen Miran who simultaneously serves as a White House economic adviser.
This development injects unease about potential political influence over monetary policy at a moment when the Fed’s credibility is paramount. For now, the market is squarely focusing instead on near-term easing and perhaps leaving Fed independence worries for a later date.
Gold continues to be a standout winner in this environment. Prices have climbed to a new record high near $ 3,689, powered by falling yields and a weaker dollar. With flow steadily rotating into the yellow metal, the path for further gains remains open and with increasing number of institutional forecasts cluster between $3,700 and $4,000 over the medium term. More importantly, gold’s role is evolving and it is now increasingly seen as protection against political risk and Fed independence worries.
Looking ahead, all eyes now turn to Powell’s press conference. A 25bp cut is fully priced but what matters is the language of the statement and the trajectory laid out. Should the Fed affirm a gradual path of further easing, equities could find renewed interest while gold will remain supported.