Written by Powell closes door to more cuts before stepping down
The Federal Reserve left interest rates unchanged on Wednesday as expected, in another split vote that saw two officials dissenting. Governors Miran and Waller both voted for a 25-basis-point reduction in the federal funds rate, but that’s unlikely to be seen as an indication that the next cut is around the corner.
The FOMC statement pointed to “some signs of stabilization” in the unemployment rate, while inflation remained “somewhat elevated”. Powell told reporters that the economic outlook has “clearly improved” since the last meeting and offered no hints on the possible timing of the next cut, stressing that “We think our policy is in a good place”.
Powell’s stance yesterday indicates that the prospect of further easing at the remaining two policy meetings before his term as Chair expires in May is extremely low. Nevertheless, year-end rate-cut expectations showed little reaction to the decision and Powell’s comments, suggesting that investors are pinning their hopes on the next Chair taking a more dovish view on interest rates.
Dollar mired in Trump uncertainty
Moreover, although most FOMC members are unhappy about inflation still being above target, Powell reiterated that higher tariff-driven goods prices are the main contributors to the inflation overshoot, which he sees as being a “one-time price increase”. Hence, even under Powell’s leadership, the Fed seems to be leaning towards a resumption of rate cuts in the second half of the year.
This likely explains why the US dollar fell back after the decision, having risen ahead of it. The greenback was boosted on Wednesday from remarks by US Treasury Secretary Scott Bessent, who reassured investors that America still has a strong dollar policy, following comments by President Trump the prior day when he described the currency’s slide as “great’.
Bessent also strongly denied that the US had intervened in the currency market to support the yen but did not comment when asked if the US would take such action in the future. However, the dollar’s upside was short lived, and the currency is under pressure again on Thursday amid a resurfacing of fears about President Trump’s erratic policies, which are increasing the risk premium on the US dollar, marking a return of the debasement trade.
Gold and oil surge as Trump threatens Iran
Trump’s latest focus is Iran, as the US is sending a “massive armada” to the region, with the President warning Tehran that “time is running out” to make a deal on abandoning its nuclear program. Trump posted on his Truth Social platform yesterday the fleet is “ready, willing, and able to rapidly fulfill its mission, with speed and violence”.
It’s unclear how long the White House is willing to wait for Tehran to come to the negotiating table and whether the US military has already made plans on how to carry out an attack on Iran, or if this is just all a bluff. His recent actions on Venezuela suggest otherwise.
Unsurprisingly, the safe-have gold is extending its record-setting streak today, hitting a new all-time high of just under $5,595/oz. Silver has also set a new record, reaching $120/oz. Other metals are also getting caught up in the speculative trade taking precious metals by storm, as copper futures are up 6% today.
Oil futures are gaining momentum too, with WTI jumping by almost 3% to $65.
FX majors break key levels, ECB on alert
Meanwhile, the dollar’s plunge to four-year lows is raising eyebrows in central banks around the world. The ECB’s Villeroy yesterday warned that the euro’s appreciation could impact monetary policy. The euro has been testing $1.20 this week, while the pound is back above $1.38 and the aussie has surpassed $0.70.
The Canadian dollar is rallying too, hitting the highest since October 2024, even as the Bank of Canada struck a very neutral tone on Wednesday when it kept rates unchanged.
The Swiss franc has been another winner during the current round of dollar selloff, strengthening to 11-year highs.
Weekly jobless claims will be watched later in the day, as well as for any updates by Trump on Iran or his pick of the next Fed chief.
S&P 500 hits another record, all eyes on Apple
For equity markets, however, the focus will be on Apple’s earnings, as the Magnificent Seven begin to report their latest results. Microsoft and Facebook parent Meta Platforms both announced significant beats in revenue and earnings per share after Wall Street’s closing bell yesterday. But investors took a mixed view, as they punished Microsoft but rewarded Meta, even though both announced massive increases in AI investment.
Tesla disappointed with its revenue numbers but impressed investors with its plans for its robotaxi and robotics businesses.
The S&P 500 briefly topped the 7,000 level yesterday before finishing the session marginally lower. Futures are currently in the green, lifted by Meta and Tesla. But the gains might not hold if Apple disappoints.
By XM.com
