Dow Climbs to New Highs Amid Fed Rate Cut Hopes and Global Market Volatility | Daily Market Analysis

Key events:

• Eurozone - ECB's Elderson Speaks
• USA - FOMC Member Bostic Speaks
• USA - S&P Global US Manufacturing PMI (Sep)
• USA - S&P Global Services PMI (Sep)

The Dow edged higher to close at record highs on Friday, as investors balanced a decline in FedEx with growing expectations of further Federal Reserve rate cuts following this week's substantial reduction. The Dow Jones Industrial Average rose 38 points, or 0.1%, to a record close of 42,063.36. Meanwhile, the S&P 500 fell 0.2%, and the NASDAQ Composite slipped 0.4%.

Stocks received a late-week boost after the Federal Reserve cut interest rates by 50 basis points. Historically, markets tend to perform well when the Fed lowers rates while the economy continues to grow, and investors appear to be expecting a similar outcome.

The GBP/USD pair dropped to 1.3310, ending a three-day winning streak during early Monday's Asian session. Bank of England Governor Andrew Bailey stressed the importance of keeping inflation low, stating, "We must be cautious not to lower interest rates too quickly or by too much." The BoE recently kept interest rates at 5.0% after the UK's Consumer Price Index (CPI) remained steady at 2.2% year-on-year in August.

Meanwhile, EUR/USD remained around 1.1160 during early Asian trading. The US Dollar could face downward pressure amid rising expectations of further Federal Reserve rate cuts in 2024, which may support the EUR/USD pair. However, Fed Chair Jerome Powell clarified that rate cuts are not imminent, and 50 basis-point reductions are not the new standard.

Philadelphia Fed President Patrick Harker on Friday likened monetary policy to driving a bus, emphasizing the need for balance and noting that maximum employment concerns both job quantity and quality.

In the Eurozone, European Central Bank President Christine Lagarde reiterated that monetary policy must remain adaptable in a rapidly changing global economy. While price stability remains central, central banks must adjust to new challenges.

The AUD/USD pair traded slightly lower at 0.6805 during Monday’s early Asian session, with a softer Australian Dollar acting as a headwind. Data from Judo Bank and S&P Global revealed that Australia's preliminary Judo Bank Manufacturing PMI dropped to 46.7 in September from 48.5 in August. The Services PMI slipped to 50.6 from 52.5, and the Composite PMI declined to 49.8 from 51.7. The weaker PMI data weighed on the Australian Dollar.

The Reserve Bank of Australia is set to announce its interest rate decision on Tuesday, with expectations that the Official Cash Rate (OCR) will remain at 4.35%. RBA Governor Michele Bullock indicated that a rate cut is not expected in the near term, and that global rate-cutting trends will not influence the RBA.

Australia's labor market outperformed expectations in August, with the unemployment rate steady at 4.2%, making immediate rate cuts less likely. The RBA's rate decision and Bullock’s press conference on Tuesday will be closely followed.

Gold traded slightly lower around $2,620 during Monday’s early Asian session, remaining near its all-time high. Geopolitical tensions in the Middle East and last week’s aggressive Federal Reserve rate cut supported Gold's appeal as a safe-haven asset.

The Federal Open Market Committee’s unexpected 50 basis-point interest rate cut last week signals potential further cuts by the end of 2024, which could enhance the appeal of non-yielding assets like Gold. Additionally, rising tensions in the Middle East, especially following Hezbollah’s vow of retaliation for a recent airstrike, have pushed Gold prices higher. On Sunday, Hezbollah and Israel exchanged heavy fire, with missiles reaching northern Israel after intense bombardment, as reported by CNN.

However, Gold’s potential upside may be limited by the Fed’s optimistic outlook on US economic growth, which is forecast to expand at about 2.0% annually through 2027. This projection of a soft landing could reduce demand for safe-haven assets like Gold.

Looking ahead, Gold traders will monitor developments in the Middle East and the release of the US Purchasing Managers Index (PMI) flash reading later on Monday. A stronger-than-expected PMI could strengthen the US Dollar, adding downward pressure on USD-denominated Gold prices.