Daily Market Analysis - MONDAY JUNE 19, 2023

Fed's Comments Weigh on Market Sentiment, S&P 500 and Nasdaq Finish with Declines | Daily Market Analysis


Major Events:

-USA - Juneteenth Celebrations Commence
-Eurozone - ECB's Lane and Schnabel Deliver Speeches
-Eurozone - ECB's Schnabel Speaks


On Friday, the S&P 500 experienced a decline in its closing value, primarily influenced by market heavyweights such as Microsoft. This downward movement was triggered by remarks made by two Federal Reserve officials, which significantly tempered the optimism surrounding the central bank's anticipated conclusion of its aggressive interest rate hike measures. The market reacted to these comments, resulting in a negative impact on the overall performance of the S&P 500.

S&P 500 daily chart


In a similar vein, the Nasdaq also concluded the week with a decline, although both the Nasdaq and the S&P 500 maintained levels close to their 14-month highs. This downturn can be attributed to economic data released during the week, revealing a deceleration in inflation. The market's focus on this inflation slowdown overshadowed any concerns pertaining to potential further interest rate hikes, thereby influencing the downward trajectory of both the Nasdaq and the S&P 500.

Nasdaq daily chart

Following the US central bank's decision to keep interest rates unchanged on Wednesday, there were indications of a potential half-percentage-point increase in borrowing costs by the year's end. Nevertheless, traders are anticipating a different outcome, as suggested by CMEGroup's FedWatch tool. It suggests that there is an expectation for the Federal Reserve to either pause rate hikes or potentially even lower rates in December, subsequent to an anticipated 25-basis-point rate hike in July.

Effective Federal Funds Rate

Attempting to dampen the prevailing optimism, Federal Reserve policymakers expressed caution on Friday. Fed Governor Christopher Waller noted that core inflation was not declining as anticipated, while Richmond Fed President Thomas Barkin stated his comfort with further rate increases, as inflation had not yet reached the desired trajectory of 2%.

The recent market rebound can be partly attributed to the anticipation of heightened Chinese demand. This is a result of stimulus measures implemented by Chinese authorities to bolster their struggling economy.

Despite the Federal Reserve signaling a pause in its rate hiking cycle and the European Central Bank (ECB) implementing a 25 basis points rate hike last week, there is a growing belief that we may be approaching the peak of rate increases. However, it is widely acknowledged that a decrease in interest rates is unlikely in the near future.

Notably, the Bank of Japan deviated from the trend by maintaining its current policy settings last week, seemingly disregarding the fact that core inflation has reached its highest level in four decades.

Looking ahead, market attention will shift to the Swiss National Bank and the Bank of England in the coming week. Both central banks are expected to follow the lead of the ECB and raise rates by 25 basis points.

GBP/USD daily chart


The British pound had an impressive performance last week, with a substantial surge of 1.9% against the US dollar, reaching year-to-date highs at $1.2848. This upward momentum resulted in GBP/USD breaking through both trendline resistance originating from the high at $1.4250 and resistance at $1.2767 on the weekly timeframe. Currently, the pound is positioned at 14-month highs against the US dollar, setting the stage for a potentially significant week ahead. Market expectations revolve around the possibility of additional 100 basis points (bps) of rate hikes, further contributing to the positive outlook for the British pound.


US Dollar Currency Index

On the other hand, the US Dollar Index (DXY) is anticipated to encounter difficulties in surpassing the 103.00 level and reaching the 104.00 range. Barriers in the form of averages around the 102.00 and 103.00 levels are impeding a substantial ascent for the DXY. Conversely, the mid-101.00 range is becoming oversold, posing a dilemma for those considering short positions.

Meanwhile, gold prices remained relatively stable on Monday as investors eagerly awaited insights from a series of Federal Reserve speakers and testimonies scheduled throughout the week. These upcoming events are expected to provide valuable guidance on monetary policy, potentially influencing the trajectory of gold prices in the market.

XAU/USD daily chart

As the United States observes a public holiday, thin trading volumes are expected in the metal markets on Monday. Furthermore, the upcoming testimonies from Federal Reserve officials, particularly Chair Jerome Powell, later in the week, may discourage significant market movements and promote a more cautious approach to trading.

Throughout the upcoming week, investors will closely monitor various economic indicators and key speeches. These indicators include preliminary building permits and housing starts, Q1 current account data, existing home sales, and Markit's preliminary manufacturing and services Purchasing Managers' Index (PMIs).

Moreover, market participants will pay close attention to speeches from members of the Federal Open Market Committee (FOMC), including Bullard, Williams, Bowman, Barkin, Bostic, and Mester. The insights provided by Federal Reserve Chairman Powell, as well as speeches from Cook and Jefferson, will also play a significant role in shaping market sentiment and direction. These speeches have the potential to offer valuable perspectives on economic conditions, monetary policy, and potential future actions from the central bank.