Global Stocks Pause as Markets Await Fed's Next Move on Interest Rates | Daily Market Analysis

Key events:

• USA - Initial Jobless Claims
• USA - S&P Global US Manufacturing PMI (Aug)
• USA - S&P Global Services PMI (Aug)
• USA - Existing Home Sales (Jul)

Global stocks took a breather on Wednesday after a prolonged rally brought them close to recent record levels. Investors are now focused on upcoming signals from the Federal Reserve regarding potential interest rate cuts to guide their next steps.

Fed Chair Jerome Powell is expected to solidify expectations that the central bank will soon begin easing credit conditions, following its efforts to curb the worst inflation in four decades. Powell's speech at the Fed's Jackson Hole conference in Wyoming on Friday is highly anticipated.

Meanwhile, oil prices dipped during early afternoon trading in the U.S., while the weakening dollar, driven by the prospect of rate cuts, helped gold maintain its position near Tuesday's record high.

On Wall Street, the Dow Jones Industrial Average remained relatively flat at 40,858, the S&P 500 rose by 0.28% to 5,612, and the Nasdaq Composite advanced by 0.3% to 17,871.

Gold experienced some selling pressure during the Asian session on Thursday, slipping to the $2,500 level but managing to stay above the previous day's low. A slight rise in US Treasury bond yields supports the US Dollar, helping it regain momentum after hitting a year-to-date low on Wednesday, breaking a four-day losing streak. Additionally, a generally positive mood in equity markets diverts attention from the safe-haven appeal of gold.

However, expectations that the Federal Reserve might start cutting interest rates in September could limit the USD's recovery and continue to provide underlying support for gold prices. Recent data revealed that US job growth between March and the previous year was lower than initially reported. Furthermore, the minutes from the July Federal Open Market Committee meeting indicated that several officials were in favor of an immediate rate cut. This, combined with ongoing geopolitical tensions, could help sustain demand for gold.

Meanwhile, the GBP/USD pair remains steady in a narrow range during the Asian session on Thursday, hovering near its highest point since July 2023, around the 1.3120 mark reached on Wednesday. Currently trading around 1.3085, the pair remains largely unchanged as traders await the release of flash Purchasing Managers' Index (PMI) data from the UK and the US for further direction.

A slight increase in US Treasury yields is aiding the USD's recovery from its Wednesday low, which in turn is putting some pressure on GBP/USD. However, the diminishing likelihood of another Bank of England rate cut in September offers some support to the pair.

The Australian Dollar weakens against the US Dollar despite positive business activity data released on Thursday. Nonetheless, AUD/USD's downside may be limited by the Reserve Bank of Australia's hawkish policy outlook. The minutes from the RBA's August meeting suggest that interest rates may remain steady for a prolonged period.

Australia's Judo Bank Composite PMI rose to 51.4 in August, up from 49.9 in July. This marks the fastest growth in three months, driven by improved performance in the services sector despite a deeper contraction in manufacturing output.

USD/CHF remains subdued at around 0.8520 during the Asian session on Thursday, with a continued negative bias, marking its fifth consecutive day of losses. The Swiss Franc may find support from safe-haven demand due to the ongoing conflict between Israel and Hamas, which raises concerns of broader unrest in the Middle East.

On Wednesday, US President Joe Biden urged Israeli Prime Minister Benjamin Netanyahu to prioritize a truce in Gaza and the release of hostages. However, both Israel and Hamas stood firm on their respective demands. This conversation, involving Vice President Kamala Harris, followed reports from Palestinian health officials that at least 50 Palestinians were killed in Israeli airstrikes within 24 hours, as per a Reuters report.

Commerzbank FX Analyst Michael Pfister noted that recent market volatility has driven strong demand for safe-haven assets, benefiting the Swiss Franc. However, Pfister anticipates moderate weakness in CHF over the coming months, expecting the Swiss National Bank to further lower interest rates.

The Japanese Yen weakens against the US Dollar on Thursday, with USD/JPY gaining ground following Japan's record trade deficit report on Wednesday. Investors are awaiting Bank of Japan Governor Kazuo Ueda's upcoming speech in parliament on Friday, where he will address the central bank's recent decision to raise interest rates.

A Reuters poll conducted between August 13 and 19 and published on Wednesday indicated that 31 out of 54 economists expect the BoJ to raise interest rates before year-end, with a median forecast of a 25 basis point increase, bringing the year-end rate to 0.50%.

Traders are likely holding off on making significant moves until after Fed Chair Jerome Powell's speech at the Jackson Hole Symposium on Friday. As a result, bearish traders should exercise caution. In the meantime, investors are focused on Thursday's US economic data releases, including Weekly Initial Jobless Claims and Existing Home Sales, for potential short-term trading opportunities.