Market Caution as Fed Meeting Begins; Treasury Yields and Apple Influence Gains | Daily Market Analysis

Key events:

• UK - GDP (MoM) (Apr)
• USA - Core CPI (MoM) (May)
• USA - Crude Oil Inventories
• USA - FOMC Economic Projections
• USA - FOMC Statement
• USA - Fed Interest Rate Decision
• USA - FOMC Press Conference

The S&P 500 was poised for a record close on Tuesday after paring losses due to falling Treasury yields and a surge in Apple stock to a new high. However, gains were tempered by caution as the Federal Reserve began its two-day meeting.

The Dow Jones Industrial Average dropped 109 points, or 0.3%, while the S&P 500 increased by 0.2%, and the NASDAQ Composite rose by 0.7%.

The 10-year Treasury yield fell 7.4 basis points to 4.397% following a $38 billion auction of 10-year notes, which were awarded at lower-than-expected yields, indicating stronger demand. Yields on 2-year, 5-year, and 30-year Treasuries also declined in response to the auction's robust results.

As the Federal Reserve commenced its two-day policy-setting meeting, the central bank was widely anticipated to keep interest rates steady within the 5.25% to 5.5% range on Wednesday. The monetary policy statement will feature the Fed's updated "dot plots," projecting interest rates, inflation, and unemployment. Remarks from Fed Chair Jerome Powell are expected to capture significant investor attention.

In addition to the Fed decision, the release of the May US consumer price index, a key inflation indicator, is highly anticipated. Further signs of easing inflation could solidify expectations for rate cuts, especially amid signs of economic weakness. Conversely, a disappointing inflation report could alarm investors and rekindle recession fears that have been dormant for months.

The Australian Dollar edged higher on Wednesday, likely buoyed by the Reserve Bank of Australia's hawkish stance on maintaining higher rates this year. Last week, RBA Governor Michele Bullock suggested that the central bank is ready to raise interest rates if the CPI doesn't return to the target range of 1%-3%, as reported by NCA NewsWire.

However, the Australian Dollar may face challenges due to softer-than-expected Chinese consumer inflation data released on Wednesday. China’s CPI rose by 0.3% year-over-year in May, missing the forecasted 0.4% increase. Monthly CPI inflation in China fell by 0.1% in May, contrasting with April’s 0.1% rise.

The EUR/USD pair fluctuated within a narrow range during the Asian session on Wednesday, consolidating its recent losses to around the 1.0720 area, the lowest level since early May. Spot prices hovered just below the mid-1.0700s, nearly unchanged for the day, as traders awaited the US consumer inflation figures and the critical Federal Open Market Committee decision before making new bets.

The Euro was pressured by Eurosceptic nationalists' significant gains in the European Parliament elections. Additionally, political uncertainty in France, with President Emmanuel Macron calling snap elections later this month, contributed to limiting the EUR/USD pair.

The Japanese Yen continued its losing streak for the fourth consecutive session on Wednesday. The USD/JPY pair strengthened as investors favored the US Dollar ahead of the Federal Reserve's decision.

The Yen might receive support from higher-than-expected Japanese PPI data, which showed a 2.4% year-on-year rise in May, exceeding market expectations of a 2.0% increase. This raised concerns about higher consumer inflation.

The Bank of Japan is expected to keep its monetary policy unchanged on Friday. The interest rate gap between the US and Japan continues to undermine the Japanese Yen, benefiting the USD/JPY pair.

The USD/CAD pair edged lower during the Asian session on Wednesday, trading around the mid-1.3700s. Despite this slight decline, spot prices remained close to the highest level since April 19, near the 1.3790 area reached on Tuesday. Traders are awaiting more signals about when the Federal Reserve will start cutting rates before making directional bets.

The focus remains on the release of the latest US consumer inflation figures and the outcome of the two-day FOMC meeting. The Fed decision will include updated economic projections and the "dot plot," providing fresh insights into the US central bank's rate-cut path. This will significantly influence the near-term US Dollar price dynamics and impact the USD/CAD pair.