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The US Federal delivered a near unanimously expected rate hike. The FOMC voted unanimously to raise rates by 25 basis points, its first increase since 2023. The important surprise was the forward guidance: the Fed indicated that it may need to tighten once more this year as inflation remains too high, and elevated oil prices add to the inflation risk. Markets are now expecting, on a balance of probabilities, that the Fed will again hike by 0.25% at its next meeting in October.
The US Dollar has broken higher. The Dollar Index rose to approximately 100.25–100.33, its highest level since late July. The Euro fell sharply after the Fed announcement, with EUR/USD dropping to around 1.1470, while USD/JPY climbed close to 156.00.news. However, over the past few hours, the Dollar seems to be making a U-shaped reversal which is starting to look impulsive, so it might continue.
US Treasury yields remain elevated. The 10-year Treasury yield is still above 5%, reflecting the Fed’s renewed tightening cycle, persistent inflation concerns, and high government borrowing needs. This remains a clear bullish long-term trend in yields, although traders should be alert to sharp pullbacks after the major move already seen. Trend traders will already be long of the 2-Year and 10-Year Treasury Yield futures, which are very affordable as they are available as micro futures on the CME (small position size).
The Bank of England announces its decision today on rates at a policy meeting. The BoE is strongly expected to leave its Bank Rate unchanged at 3.75% for a sixth consecutive meeting, despite UK annual inflation rising from 2.9% to 3.1% in August. The vote split and the Bank’s forward guidance will be more important than the rate decision itself; markets are increasingly expecting a 0.25% hike at the November meeting. This meeting the day after the Fed and UK CPI data will put the GBP/USD currency pair in focus. A dovish BoE hold or a less-hawkish-than-expected vote split could put further pressure on the Pound, while clear language that rates may rise in November could produce a Sterling recovery.
The Japanese Yen is weaker, but the BoJ is holding a policy meeting tomorrow, and is expected to hike its interest rate by 0.25%. USD/JPY moved close to 156.00 as the Fed’s hawkish stance boosted the Dollar. The Bank of Japan will announce its policy decision tomorrow, and markets still expect a 0.25% rate hike. A hike is broadly priced in, so the Yen is likely to respond most strongly to the Bank’s guidance on whether further tightening will follow. As the Yen has strengthened so much lately, I think a dovish surprise has the most potential as a directional move.
Crude oil has pulled back but remains very elevated. Brent Crude fell 2.7% yesterday to settle near $105.83, while WTI is near $102.00. This decline reflects some easing of the immediate risk premium, but prices remain high because the Strait of Hormuz and broader Middle East supply situation continue to pose a substantial risk to global oil flows.
Soybeans remain the strongest agricultural commodity trend, with the price reaching a new 2.5 year high yesterday. Soybeans are supported by Chinese buying, solid processing demand, and restricted Brazilian farmer selling. Sugar and Wheat have corrected enough to weaken their former bullish trend-following setups, but Soybeans remain attractive on the long side, although the trend is already mature.
Gold is recovering strongly after a sharp post-Fed fall. Gold initially dropped to a near six-week low after the Fed decision but has rebounded during Asian trading and is now well above $4,300. The bounce is notable given the stronger Dollar and higher yields, but the $4,300–$4,335 area remains important resistance. A sustained move above it would be a bullish sign; failure there could revive the bearish technical picture.