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In an essay, Atlanta Fed President Raphael Bostic anticipates that gradual slowdown in the labor market and overall economic activity will lead to inflation decreasing to the target level of 2% by 2025, or slightly later.

Bostic mentioned that instead of maintaining the federal funds rate until the inflation target is achieved, he would prefer to start reducing the policy rate once there is clear evidence that inflation is on a definitive path towards the 2% objective.

Taking all factors into account, Bostic stated, "I continue to believe conditions will likely call for a cut in the federal funds rate in the fourth quarter of this year."

However, he emphasized flexibility, indicating that he is "not locked into any particular policy path" and that adjustments will be based on evolving data and economic conditions.

Bostic acknowledged the possibility of varying scenarios, including more cuts, no cuts, or even a rate increase, depending on how the situation develops. "I will let the data and conditions on the ground be my guide," highlighting the importance of data-driven decision-making in monetary policy.

Full essay of Fed's Bostic here.

• Gold bulls step in from near key support zone
• RSI and MACD suggest momentum is turning positive
• Advances within the current sideways range may be possible
• A dip below 2,290 could invite the bears back into the game

Gold is trading higher today, after hitting support slightly above 2,290 on Wednesday. That zone has been acting as a strong support barrier since April, and it can also be seen as the lower boundary of a sideways range that’s been containing most of the price action since then. This paints a neutral medium-term outlook but in the shorter picture, the metal may continue drifting north within the aforementioned range.

Taking a look at the short-term oscillators, the RSI has just poked its nose above its 50 line, while the MACD, although negative, has bottomed and crossed above its trigger line. Both indicators are suggesting that the momentum may have started shifting positive.

If the bulls are willing to stay in the driver’s seat and push the action above 2,340, then they could aim for the 2,370 zone, or the 2,388 barrier, which is the upper bound of the aforementioned sideways range. For the outlook to turn bullish though, a break higher may be needed. This could set the stage for extensions towards the record high of 2,450, hit on May 20.

On the downside, a dip below 2,290 could carry large bearish implications, perhaps paving the way towards the 2,195 zone, marked by the inside swing high of March 27. However, that could still not constitute a trend reversal in bigger timeframes. For that to start being examined, a dip below 2,145 may be needed.

To recap, gold has been trading within a sideways range since April, and lately it has rebounded from near the lower bound, which means that some further short-term advances may be in the works.

• JP 225 index has been steadily advancing in the short term
• On Wednesday, price jumped to its highest since April 12
• Momentum indicators are heavily skewed to the upside

The JP 225 index (cash) had been trading without clear direction since early May, fluctuating around its 50-day simple moving average (SMA). In the near term, the price broke above that crucial barrier and edged higher to a fresh two-month high.

If the price extends its recent gains, the April resistance of 39,950 could curb initial upside attempts. Surpassing that zone, the price could ascend towards the March resistance of 40,564. Should that barricade also fail, a test of the all-time high of 41,147 might be on the agenda.

On the flipside, a break below the 50-day SMA could send the price to test the March support zone of 38,300, which also held strong earlier this month. A violation of that territory could open the door for the May low of 37,600. Failing to halt there, the index could descend towards the April bottom of 36,690.

In brief, the JP 225 index’s latest break above the 50-day SMA coupled with improving momentum indicators could signal the beginning of an uptrend. 

• What is the US PCE data and why is it important?
• Uncertainty regarding the Federal Reserve and US Dollar remains high due to conflicting US data and global inflation concerns.
• The upcoming PCE data release is highly anticipated as it may influence the Fed’s stance on rate cuts.
• The US Dollar Index (DXY) is rangebound ahead of the PCE release. Will 107 finally be revisited?

Market participants continue to wrestle with uncertainty regarding the Federal Reserve and the US Dollar. The recent rise in inflation in Australia and Canada serves as a stark reminder that the fight against inflation may not be over. Over the past month, US data has been both divisive and inconclusive, splitting opinions into two camps: those advocating for immediate rate cuts and those who support the Fed’s cautious stance.

A recent lull in high impact US data has only seen anticipation grow ahead of this week’s PCE data release. This is after all considered by many the Fed’s preferred inflation gauge with the hope that it will deliver enough for the Fed to switch to a more decisive tone. It is important to note that US inflation numbers do appear to be on the right path but as policymakers have reiterated, the homestretch is always the toughest.

There is no doubting the importance of the PCE data for the US economy and Fed policymakers in particular. The question is why and I hope this sheds some light on the topic.

US PCE Data and Its Importance

The Personal Consumption Expenditures (PCE) Price Index serves as a measure of the average increase in prices for all domestic personal consumption. Unlike the Consumer Price Index (CPI), which only considers out-of-pocket expenditures, the PCE Price Index includes all expenditures, regardless of who pays for them. This encompasses spending by consumers, employers, and government programs like Medicare and Medicaid. This broader scope provides a more comprehensive view of inflationary pressures in the economy.

The reason many consider it the Fed’s preferred inflation gauge is complex. Unlike the CPI it is a much less volatile index. There are many other reasons such as the flexible weighting and comprehensive coverage while not forgetting healthcare costs which are a big part of the US economy as well. Thus it is the Core PCE number that is frequently highlighted in economic analyses to understand long-term inflation trends without the noise from the more volatile food and energy sectors. As with most things markets (whether right or wrong) related, a longer term view is always perceived as more reliable.

Looking at the relationship between the US Dollar and the PCE data is definitely a worthwhile exercise. The PCE index is seen as a good predictor as to the path of both monetary policy and the US Dollar. Look at the chart below which compares the USD Index (blue line), Core PCE number (red line) and the US Interest rate (green line).

2021 serves as a perfect example. Core PCE or the red line begins to rise at the back end of 2020 and accelerates into 2021. This sees the likelihood of interest rate hikes increase and thus the US Dollar index begins to strengthen and rises as well.

Comparison Chart- US Dollar Index (DXY) vs US Interest Rate vs US PCE Index, June 27, 2024

Source: TradingView.com (click to enlarge)

Impact on the US Dollar and Fed Policy

Looking at the chart above and the current climate, it is obvious why market participants are expecting rate cuts to materialize soon. The PCE number has been on a sharp decline since early 2023 but does seem to have plateaued of late which is likely the reason for growing uncertainty from market participants as it remains above the Feds targeted 2% mark.

If US PCE data continues to decline, market participants are likely to adjust their expectations for rate cuts. This could theoretically weaken the US Dollar. Conversely, an increase in the PCE number is likely to strengthen the Dollar. Market consensus for tomorrows release sees both the CORE and headline number at 2.6%.

Of course there is another big event happening this evening and that is the debate between US President Joe Biden and former President Donald Trump. This may be the first glimpse of what market participants can expect from the US Dollar when the US elections come around later in the year. A victory in the debate for Trump should strengthen the US Dollar as Trump is seen as more favorable to the US Dollar at this stage. The question is with uncertainty around monetary policy, will markets respond as expected?

Lastly, we are at the end of Q2 and that means market participants and fund alike will be repositioning and updating their allocations ahead of a new quarter. This could lead to some unexpected volatility and is worth keeping in mind as the week draws to a close.

Technical Analysis on the US Dollar Index (DXY)

The US Dollar index has been topsy turvy for the longest time as policy uncertainty remains prevalent. The lack of clarity has meant that any breakout attempts or long term directional moves have remained absent in 2024.

Looking at the daily chart below and having broken the interior ascending trendline and the exterior one, the DXY failed to fall further. Instead the DXY printed a strong reversal pushing back up to the 106.00 handle.

The key multi-month resistance level at the 107,00 area continues to hold firm and does not look likely to give way anytime soon. It would require a substantial miss to the downside from tomorrow’s PCE data for the possibility of a sustained break of 107.00 to materialize.

US Dollar Index (DXY) Daily Chart, June 27, 2024

Source: TradingView.com (click to enlarge)

Key Levels to Keep an Eye on;

Support

• 105.63
• 105.00
• 104.50

Resistance

• 106.50
• 107.00
• 108.50

Japanese yen remains below 160

USD/JPY is trading at 160.38 early in the North American session, down 0.25% on the day. The Japanese yen has been trading below 160 on Thursday, after dropping as low as 160.87 on Wednesday, its lowest level since December 1986.

As the yen continues to hit new lows, there are concerns of another intervention from the Bank of Japan in order to stem the currency’s rapid depreciation. The BoJ is believed to have intervened on April 29, when the yen fell as low as 160.20 and again on May 1, selling some $61 billion and purchasing yen. The first intervention boosted the yen by 1.25% and the second by 2%. However, the moves haven’t had a lasting effect and all of the yen’s gains have been wiped out.

Predictably, Japanese officials have warned that they will take action and Japan’s top currency diplomat Masato Kanda said on Wednesday that the yen’s rapid deprecation was a “serious concern” and that he was monitoring events with a “heightened sense of urgency”.

The verbal intervention is unlikely to have much effect, given that actual intervention has failed to stem the yen’s rapid decline. Japan’s interest rates are around zero and with the Federal Reserve not lowering rates before September at the earliest, the US/Japan rate differential will remain wide. It could be a miserable summer for the Japanese yen.

There was some good news as Japan’s retail sales rose 3.0% y/y in May, up from a revised 2.4% gain in April and blowing past the market estimate of 2.0%. This marked a 26th straight month of expansion, as higher wages have fueled stronger consumer spending.

USD/JPY Technical

• USD/JPY is testing support at 160.43. Below, there is support at 160.00
• There is resistance at 161.26 and 161.69

The dollar index fell on Thursday, following overall slightly better than US data and warning from Japan’s authorities about possible action against sharp fall of yen.

The US economy grew by 1.4% in Q1 vs expected 1.3% rise, weekly jobless claims fell below expectations and durable goods orders jumped well above forecast in May, while traders started to exit dollar longs on looming Japan’s intervention.

However, the pullback from the highest in nearly two months was so far mild and could be seen as a healthy correction, as dollar continues to benefit from growing political uncertainty in Europe and Fed’s narrative about holding the policy unchanged for extended period.

Fresh weakness faces initial support at 105.24 (daily Tenkan-sen) with deeper pullback likely to find firm ground above pivotal supports at 104.95/90 (Fibo 38.2% of 104.61/105.78 upleg / daily cloud top) to keep larger bulls in play.

Expect increased downside risk on loss of 104.90/70 pivots, which would open way for deeper correction.

Res: 105.78; 106.00; 106.22; 106.36.
Sup: 105.24; 104.90; 104.70; 104.31.

Markets

No follow-through price action on yesterday’s rise in long-term yields for now. We at least partially attributed the move to investors’ pondering issues of long-term fiscal sustainability in Europe but also in the US. The Biden-Trump presidential debate later today might provide some additional insights on how much (or how little) priority both candidates are prepared to give to this key policy topic. In the meantime, US eco data today printed rather soft. May durable goods orders showed a lackluster picture (+0.1% M/M after +0.2% in April). Capital goods shipments nondefense ex aircraft, unexpectedly declined 0.6% M/M, indicating potential poor investment growth in Q2. US initial jobless claims declined slightly from 239k to 233k, but continuing claims (1839k) rose to their highest level since end 2021. Recently some Fed governors were on alert that the labour market might be heading for a turning point and that an unexpected softening in labour market conditions also might have consequences for monetary policy as the Fed targets both price stability and maximum employment. US yields currently decline 3 to 4.5 bps across the curve. EMU yields also felt some mild spill-over from the decline in the US, but German yields currently show changes of less than 1 bp across the curve. ECB speakers (Kazaks and Kazimir) both indicated the higher than expected wage growth as an important factor preventing faster ECB rates cuts. The focus on interest rate markets now mainly turns to tomorrow’s US May PCE deflators and the first June CPI estimates in some EMU members states. US equites open marginally higher despite some negative tech-related headlines yesterday. The Eurstoxx 50 is trading little changed. Brent oil ($ 86,2/b) continues to test the strongest levels since early May.

Softer US data cause the dollar to return most of yesterday’s gain. The DXY index fails to hold above the 106 big figure (105.75). EUR/USD rebounded from opening levels near 1.068 to currently 1.0725. The broader dollar correction only provides very limited relief for the yen. At 160.45, USD/JPY still trades within reach of multi-year peak levels. Sterling also underperforms the euro with EUR/GBP coming within reach of first minor resistance at 0.8475.

News & Views

The Swedish Riskbank kept its policy rate unchanged at 3.75% following an inaugural 25 bps rate cut in May as the Board considers that monetary policy should be adjusted gradually. If inflation prospects remain the same, two or three additional rate cuts can be expected in H2 2024. The Riksbank convenes 4 times over that time span with the next gathering being on August 20 (August or September; November and/or December based on current expected path). Swedish inflation is close to the 2% target and economic activity is weak. Updated CPIF forecasts plot average inflation below 2% in both 2025 (1.8% from 1.9%) and 2026 (1.9% from 2%). Together with a little stronger Swedish krone (though still undervalued according to governor Thedeen), this triggered a small downward adjustment to the policy rate path: 3.33% quarterly average in Q4 2024 (from 3.44%), 3.08% in Q1 2025 (from 3.2%) and 2.67% in Q2 2026 (from 2.7%). The Swedish krone underperformed following the central bank’s dovish hold. EUR/SEK rises from 11.30 towards 11.35.

The Turkish central bank went for a similar policy rate status quo, but obviously at a completely different level. Its key rate is stable at 50% for a third month straight. The MPC reiterates that the tight monetary policy stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range (underlying inflation reaching 5% in the medium term). Upward inflation risks remain and warrant the hawkish tightening bias. It is prepared to use all the tools at its disposal (also liquidity measures). The TCMB is nevertheless hopeful that disinflationary forces will be established in H2 2024 as the lagged effects of monetary tightening kick in. Ever since reaching the 50% (peak) rate, EUR/TRY trades sideways near all-time highs, between 34.50 and 35.50.

Graphs

EUR/CZK: koruna declines (albeit modestly) as CNB maintains 50 bps rate cut pace rather than slowing to 25 bps step

EUR/SEK :Swedish krona cedes ground as Riksbank sees room for two to three 25 bps rate cuts in H2

US 10-yr yield: Long-term yields, for now, fail to build on poor fiscal outlook

Nasdaq to try new test of all-time top after recent correction?.

Daily Pivots: (S1) 160.00; (P) 160.43; (R1) 161.26; More...

Intraday bias in USD/JPY stays on the upside. Sustained trading above 100% projection of 151.86 to 157.70 from 154.53 at 160.37 will pave the way to 161.8% projection at 163.97. On the downside, below 159.18 minor support will turn intraday bias neutral again first. But outlook will stay bullish as long as 157.70 resistance turned support holds.

In the bigger picture, there is no sign of long term trend reversal yet. Further rally is expected as long as 151.86 support holds. Decisive break of 160.02 will target 100% projection of 127.20 to 151.89 from 140.25 at 164.94.

Daily Pivots: (S1) 0.8950; (P) 0.8967; (R1) 0.8990; More…

Intraday bias in USD/CHF stays neutral at this point. Further decline is still expected with 0.8992 resistance intact. Below 0.8912 minor support will bring retest of 0.8825 low. Firm break there will resume the fall from 0.9223 to 61.8% retracement of 0.8332 to 0.9223 at 0.8672. However, firm break of 0.8892 will argue that fall from 0.9223 has completed as a three-wave corrective move to 0.8825. In this case, intraday bias will be back on the upside for 0.9157 resistance.

In the bigger picture, price actions from 0.8332 medium term bottom are seen as developing into a corrective pattern to the down trend from 1.0146 (2022 high). Rejection by 0.9243 resistance affirms this case, and maintains medium term bearishness. While more range trading could be seen between 0.8332/0.9243 first, downside break out is mildly in favor at a later stage.

Daily Pivots: (S1) 1.2594; (P) 1.2644; (R1) 1.2672; More...

Further decline is expected in GBP/USD as long as 1.2702 resistance holds. Sustained trading below 1.2633 resistance turned support will argue that whole rise from 1.2298 has completed, and target 1.2445 and below. On the upside, however, firm break of 1.2702 resistance will argue that pull back from 1.2859 has completed, and bring retest of this high instead.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern that is still in progress. Break of 1.2445 support will confirm that another falling leg has started and target 1.2036 cluster support again (38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075. Nevertheless, break of 1.2892 resistance will argue that larger up trend from 1.0351is ready to resume through 1.3141.