The Fed successfully avoided a market panic

The Fed Successfully Avoided a Market Panic – The Federal Reserve’s decisive decision to cut interest rates and its commitment not to lag behind in providing monetary easing has reshaped the policy outlook for countries around the world.

In Europe and other developed nations, where officials typically assert that decisions made in Washington do not influence their own policy direction, there may be some reassurance in Fed Chair Jerome Powell’s statement on Wednesday that the US economy is still in good shape.

Powell and his colleagues faced the risk of causing public concern about increasing recession risks by cutting rates more than most economists had expected. Instead, he sought to reassure, stating that the Fed’s patience in not acting until now had paid off by boosting confidence and taming inflation, which had surged to its highest level since the 1980s.

Wednesday’s action was described as “a sign of our commitment not to fall behind the curve,” by Powell. Initially, investors reacted with confidence, although US stocks closed with modest declines.

Stocks rallied globally on expectations that the Federal Reserve’s half-percentage-point interest-rate cut will shield the world’s largest economy from a downturn.

US equity futures surged, with a 1.3% gain in S&P 500 contracts, setting the stage for the underlying benchmark to potentially reach a record high in the cash market. Nasdaq 100 contracts also rose by 1.8%, driven by expectations of resilient American growth and lower borrowing costs. Europe’s Stoxx 600 index gained as much as 1.1%.

What are the markets pricing?

Before the Federal Reserve’s decision, markets were expecting a 100-basis-point rate cut by the end of the year. However, after the Fed cut the rates by 50 basis points yesterday and considering the Fed’s message, dot plot, and the economic projections, markets are now expecting a more aggressive approach from the Fed in the future.

The Fed Funds Futures are currently pricing in an additional 70-basis-point rate cut between the November and December meetings. This implies that the market is very close to pricing in a 75-basis-point rate cut between November and December, which also suggests that one of the next two meetings might see another 50-basis-point rate cut.

DXY pump & dump

The US Dollar index ended yesterday’s trading higher, showing a clear bullish shooting star after the Fed’s decision. However, it significantly reversed course during this morning’s Asian and European sessions, dropping to as low as the 100.60 support area. It is likely that this level will be broken, potentially opening the door for further declines towards the key psychological support level of 100.0.

The technical indicators are still not indicating oversold conditions, which suggests that there could be further downward movement. At the same time, with market expectations leaning towards more aggressive interest rate cuts by the Fed, at least a 25 basis point cut is not yet factored into the pricing. This could lead to a decline in the dollar index towards 100.0 initially, followed by 99.30.

EURUSD near 1.12

EURUSD has once again held well above the 1.11 support area, leading to another bounce above 1.1170 by the time this report is released. This maintains the bullish outlook in the short term. The next resistance currently stands at 1.12, which is likely to be broken, especially considering that the ECB is being less aggressive in easing policy compared to the Fed.

The technical indicators remain bullish on most timeframes, maintaining the bullish outlook. A break above 1.12 would pave the way for further gains towards 1.1275 for now, with the technical indicators still far from being overbought.

Gold approaching $2600

Gold experienced a volatile day, hitting a peak of $2600, then dropping to $2550, and rebounding in Asia and Europe, nearing its record high once again.

The technical indicators are not showing overbought conditions yet, which increases the possibility of a break above the $2600 mark. A short-term retracement is highly possible after this recovery. The bullish outlook remains intact as long as gold continues to trade above $2525 for now.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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