Global Markets Brace for Central Bank Updates: US Stocks Steady, Currencies and Gold in Play | Daily Market Analysis

Key events:

• UK - CPI (YoY) (Aug)
• Eurozone - CPI (YoY) (Aug)
• USA - Crude Oil Inventories
• USA - FOMC Economic Projections
• USA - FOMC Statement
• USA - Fed Interest Rate Decision
• USA - FOMC Press Conference

US stocks remained mostly unchanged on Tuesday, despite an upbeat retail sales report that eased concerns about a significant economic downturn ahead of the Federal Reserve's upcoming policy meeting.

Both the Dow Jones Industrial Average and the S&P 500 ended the day flat, while the NASDAQ Composite rose by 0.2%.

GBP/USD edged higher to around 1.3160 during Wednesday's Asian session. All eyes are on the United Kingdom's Office for National Statistics (ONS), which is set to release August Consumer Price Index (CPI) data. As a key inflation indicator, the CPI plays a critical role in shaping the Bank of England’s monetary policy, making it a significant driver of the British Pound.

In August, the BoE reduced its benchmark interest rate by 25 basis points (bps) to 5%, with a narrow majority of 5 out of 9 Monetary Policy Committee (MPC) members backing the move. The announcement, though widely expected, triggered a selloff in GBP, pushing the GBP/USD pair to a low of 1.2664 shortly after.

For August, the UK CPI is projected to have grown at an annual rate of 2.2%, consistent with July's figure. The core annual reading is expected to rise to 3.5%, up from 3.3% in the prior month, while the monthly index is forecast to increase by 0.3%, rebounding from July’s 0.2% decline.

The USD/CAD pair is under slight pressure in Wednesday’s Asian session, trading below the 1.3600 mark, down just under 0.10%. The pair has been range-bound over the past week as traders await central bank updates before committing to a new directional move.

The Federal Reserve will announce its policy decision later today, with markets broadly expecting the start of a rate-cutting cycle. Additionally, the Fed's economic projections, including the dot plot, are expected to significantly influence the near-term performance of the US Dollar and could provide fresh momentum for the USD/CAD pair.

However, downside risks for the USD/CAD seem limited, as traders anticipate a larger rate cut from the Bank of Canada in light of recent data showing that Canadian inflation hit the BoC's 2% target in August. Along with a slight pullback in crude oil prices, this could offer support to the USD/CAD pair, giving pause to bearish traders.

EUR/USD trades positively around 1.1125 during Wednesday’s Asian session, benefiting from expectations of a deeper rate cut from the Federal Reserve. Investors are also focusing on the Eurozone's Harmonized Index of Consumer Prices (HICP) and the Fed meeting, which will be key highlights for the day.

Meanwhile, a less dovish tone from European Central Bank officials supports the Euro against the USD. ECB policymakers have reiterated that their decisions will remain data-driven, strengthening the EUR.

The Japanese Yen recovered against the USD amid increasing speculation of a large Fed rate cut. The focus will shift to the Bank of Japan’s policy decision on Friday, where rates are expected to remain unchanged, although the BoJ may leave the door open for future rate hikes.

Japan’s Merchandise Trade Balance showed a larger-than-expected deficit of ¥695.30 billion in August, up from ¥628.70 billion in July but well below the anticipated ¥1,380.0 billion shortfall. Exports grew 5.6% year-over-year for the ninth consecutive month but missed expectations of 10.0% growth. Imports rose by just 2.3%, the slowest pace in five months, falling short of the projected 13.4% increase.

The Australian Dollar continued its upward trajectory for the third straight day against the US Dollar on Wednesday. The AUD/USD pair could see further gains as the Reserve Bank of Australia maintains a hawkish outlook. RBA Governor Michele Bullock emphasized that rate cuts remain premature due to persistent inflation, while Assistant Governor Sarah Hunter pointed out that although the labor market remains tight, wage growth has likely peaked and is expected to decelerate.

Meanwhile, gold prices attracted buyers during the Asian session on Wednesday, pausing the previous day's pullback from near-record highs. Expectations of more aggressive monetary easing by the Federal Reserve failed to bolster the US Dollar after its overnight recovery from July 2023 lows, supporting the non-yielding metal.

Concerns over rising tensions in the Middle East and political uncertainty in the US ahead of the November presidential election also contributed to gold’s appeal as a safe-haven asset.

However, many investors are likely to wait for key central bank events later this week, including the Federal Open Market Committee (FOMC) meeting's conclusion and economic projections on Wednesday, followed by the Bank of England's meeting on Thursday and the Bank of Japan's policy update on Friday. These events could create market volatility and impact gold prices further.