Fed Chair Powell's Testimony Spurs US Stock Decline, BoE Expected to Hike Rates Amid Gloomy Outlook | Daily Market Analysis

Key events:          

• Switzerland - SNB Interest Rate Decision (Q2)  
• Switzerland - SNB Press Conference     
• UK - BoE Interest Rate Decision (Jun)  
• UK - BOE Inflation Letter    
• USA - Initial Jobless Claims
• USA - Existing Home Sales (May)  
• USA - Fed Chair Powell Testifies     
• USA - Crude Oil Inventories    

On Wednesday, the US stock market experienced a decline as Federal Reserve Chairman Jerome Powell's testimony before Congress emphasized the central bank's commitment to curbing inflation, hinting at the possibility of additional interest rate increases. This marked the third consecutive day of losses for all three major US stock indices, with tech giants and tech-related companies weighing heavily on the market.

During his testimony before the US House Financial Services Committee, Powell reiterated the central bank's determination to bring inflation back down to the targeted 2% goal. He suggested that if the current trajectory of the economy continues, it would be reasonable to anticipate future interest rate hikes. Market indicators currently reflect a 74.4% probability of a 25 basis point rate hike at the conclusion of the monetary policy meeting in July, according to CME's FedWatch tool:

Powell is scheduled to provide further testimony before the Senate Banking Committee on Thursday. Within the S&P 500, energy stocks led the gainers among the 11 major sectors, rebounding from a significant decline experienced the previous day. Conversely, the technology and communication services sectors suffered the largest percentage drops.

In other news, Amazon.com (NASDAQ: AMZN) faced legal issues as the Federal Trade Commission (FTC) filed a lawsuit against the e-commerce giant, alleging that it had deceived customers into subscribing to its Prime services without obtaining their consent.

Furthermore, Tesla Inc (NASDAQ: TSLA) experienced a decline of over 5% after Barclays downgraded the stock from Buy to Hold. Concerns were raised regarding potential price cuts by the electric vehicle manufacturer, which could negatively impact its margin and earnings.

During the American trading hours yesterday, the US Dollar experienced significant selling pressure, leading to the reversal of its three-day winning streak and the elimination of its weekly gains. As of early Thursday, the US Dollar Index (DXY) remained relatively stable, hovering just above 102.00.

On Wednesday, the price of gold dropped to its lowest level in three months, falling below $1,920. However, it managed to recover slightly later in the American session as US Treasury bond yields retreated. Nevertheless, early Thursday shows XAU/USD struggling to maintain its position, trading in negative territory slightly below $1,930.

On Thursday, the upcoming monetary policy decisions of two significant central banks, the Swiss National Bank (SNB) and the Bank of England (BoE), will be closely watched.

The Bank of England (BoE) is convening following another concerning inflation report, and it is widely anticipated that they will raise interest rates by an additional 25 basis points.

The BoE has been the first major central bank to initiate rate hikes in order to combat inflation. However, its efforts have proven to be less effective compared to other banks, as British inflation is the highest among developed economies, nearing 9%. As a result, the BoE is expected to be the last central bank to conclude its rate-hiking cycle. It is projected that the bank will implement six more 25 basis point rate hikes, ultimately reaching a peak rate of over 6% by the end of this year or the beginning of the next.

Given the gloomy macroeconomic conditions, it is difficult to envision how the UK will manage to evade a recession.

Following the release of the UK inflation report, the British pound did not attract a significant number of buyers. After initially testing resistance at 1.28, the GBP/USD currency pair retraced to pre-data levels and even traded at its lowest level in five sessions. Conversely, the EUR/GBP currency pair experienced a sharp reversal from its nearly oversold condition and rose above 0.86.

There is a possibility of a hawkish surprise from the BoE, such as a 50 basis point rate hike, either in today's meeting or in one of the upcoming meetings. This anticipation should keep the GBP/USD currency pair on track for further gains, particularly given the current environment of a weakening US dollar.

Additionally, market participants will be keeping an eye on the weekly Initial Jobless Claims data from the United States, which could provide new momentum. The US economic calendar will also include the release of the Crude Oil Inventories and Existing Home Sales data for May. Furthermore, FOMC Chairman Jerome Powell will continue his semi-annual congressional testimony, providing insights into the policy outlook.