Nick Goold
In a widely anticipated move, the Federal Reserve lowered interest rates by 0.50%, bringing them to the 4.75%–5.00% range. This marked the first rate cut in more than four years. Federal Reserve Chairman Jerome Powell explained that this decision was necessary to support the job market as inflationary pressures have eased. He expressed optimism that the U.S. economy could avoid a recession despite recent challenges.
Although the 0.50% reduction was expected, long-term U.S. interest rates have risen since the announcement. This is due to market expectations that further rate cuts may come later than anticipated. As a result, the U.S. Dollar Index (USD Index) strengthened, with the USD/JPY pair rising significantly, breaking the downtrend since July.
The chart below is the 10-year US interest yield. Since the 4.5% high in July 2024, the market has fallen nearly 1%, resulting in the selling of the USD and buying of Gold. This chart is vital for predicting the next major moves in all markets. Today's market rise could shift into a sustained upward trend if upcoming U.S. economic data exceeds expectations. In this scenario, the market could be caught off guard, potentially triggering a strong rally in the USD and a selloff in Gold.
US 10 year Interest Rate Chart
The Importance of Market Expectations
Following the U.S. rate cut, the USD strengthened, which might be confusing for some traders since lower interest rates typically weaken a currency. However, understanding market expectations and the market's positioning can help clarify these moves after significant economic announcements.
USDJPY 15 Minute Chart
Federal Reserve Chairman Powell had hinted in previous speeches—most notably at Jackson Hole—that interest rate cuts were likely now that inflation had subsided. Leading up to the rate cut announcement, the USD weakened as the market anticipated the move. However, after the announcement and Powell's accompanying remarks, the market adjusted its expectations of future rate cuts, leading to traders exiting their short USD positions. Some traders even bought the USD, expecting a reversal of the recent strong downward trend.
When trading, it is essential to remember that markets are forward-looking. Identifying profitable trading opportunities requires an understanding of shifts in market sentiment. While this isn’t an exact science, consistently staying informed by reading the news and analyzing the effects of previous events will help build a profitable trading strategy.
What’s Next?
Volatility is expected to remain elevated as markets await further U.S. economic data to determine whether the recent weakening trend continues. The Federal Reserve is projected to cut interest rates by another 50 basis points this year, and this expectation is already priced into the markets.
In addition to watching U.S. developments, traders should pay close attention to the outcome of the Bank of Japan’s (BOJ) meeting on Friday, September 20th. Although the BOJ is expected to maintain its current monetary policy for now, many economists believe that an interest rate increase could come by the end of the year. Any signals from BOJ officials regarding the timing of future rate hikes could spark significant market reactions.
Markets to Watch
Changes in Federal Reserve interest rate policy affect all financial markets, but here are three markets currently presenting strong trading opportunities:
USD/JPY
Since July, when the Bank of Japan hinted at future interest rate increases, USD/JPY has been in a strong downtrend as the gap between U.S. and Japanese interest rates narrowed. However, the 140.00 support level has remained intact this week. If traders close their short positions to take profits, further gains could push USD/JPY above 145, and potentially as high as 150. This presents an attractive opportunity for both short and long-term traders looking to capitalize on shifts in interest rate differentials.
Gold
Gold has surged since July, fueled by expectations of lower U.S. interest rates and concerns about the state of the U.S. economy. After the Fed’s rate cut announcement, gold spiked again, though it fell short of the psychologically significant $2,600 level, triggering some selling. If upcoming economic data exceeds expectations, traders may begin to take profits, which could result in a further pullback in gold prices. However, any renewed fears about the global economy or additional rate cuts could provide further support for gold in the long term.
Nikkei 225
The Japanese stock market has lagged behind the U.S. market, mainly due to the strengthening Yen since July. A continued rise in USD/JPY could lead to renewed bullish sentiment in Japanese equities, potentially driving the Nikkei 225 back toward the 40,000 level in the coming weeks. The Nikkei 225 offers promising opportunities, particularly if the Yen weakens further or the Bank of Japan signals a delay in future rate hikes.
The Federal Reserve’s 0.50% rate cut has sparked reactions across multiple markets, but uncertainty remains high. Traders should remain alert for upcoming U.S. economic data and closely monitor any developments from the Bank of Japan. Volatility will likely to remain high in the short term, providing opportunities for those who are prepared.
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