Markets Rally as Dow Jones Achieves First Record High Since 2022, Fueled by Federal Reserve's Dovish Signals and Gold Surpasses $2,000 | Daily Market Analysis

Key events: 

• Switzerland - SNB Interest Rate Decision (Q4)
• UK - BoE Interest Rate Decision (Dec)
• Eurozone - Deposit Facility Rate (Dec)
• Eurozone - ECB Interest Rate Decision (Dec)
• USA - Core Retail Sales (MoM) (Nov)
• USA - Initial Jobless Claims
• USA - Retail Sales (MoM) (Nov)
• Eurozone - ECB Press Conference

The Dow Jones Industrial Average achieved its first record high close since January 2022 on Wednesday, propelled by indications from the Federal Reserve that lower borrowing costs are on the horizon for 2024.

This milestone signifies the Dow's return to a bull market, marking the end of a period that began with a more than 20% decline from its closing low in September 2022, according to a widely accepted definition. The Dow concluded the day with a robust gain of 1.40%, reaching 37,090.24 points.

Wall Street experienced a notable surge following the Federal Reserve's decision to maintain interest rates.

Apart from that, the S&P 500 and NASDAQ Composite both surged by 1.4%, with the latter achieving an all-time high.

Treasury yields experienced a sharp decline in response to the Federal Reserve's decision, with the two-year Treasury yield falling 28 basis points to 4.447% and the 10-year Treasury yield dropping by 19 basis points to 4.024%.

This downward movement in Treasury yields, anticipated to persist through the holiday season and into early 2024, is expected to pave the way for further stock market gains, according to experts.

Gold prices surged above crucial levels in Asian trading on Thursday, extending the gains from the previous session following the Federal Reserve's announcement that it would cease raising interest rates and projected a decrease in borrowing costs for 2024.

As widely anticipated, the central bank maintained interest rates and signaled a likelihood of larger-than-expected interest rate cuts in 2024, citing substantial progress in bringing inflation back within its annual 2% target.

This move fueled speculation about the timing of the Fed's anticipated cuts and triggered significant losses in the dollar, approaching a four-month low. The appeal of gold rose in response, surpassing the significant $2,000 an ounce threshold.

The Federal Reserve communicated that interest rates had peaked at 5.4%, projecting at least three rate cuts in 2024 to reach 4.6%. Fed Chair Powell acknowledged that it was premature to declare victory over inflation but forecasted a lower inflation outlook for 2023.

The dovish stance by the Fed intensified speculation about the timing of rate cuts, with Fed fund futures prices indicating a 70% likelihood of a 25 basis points rate cut in March 2024, and a 67% chance for another 25 basis point cut in May.

However, uncertainties surrounding these rate cuts are expected to temper optimism in the coming months, especially given the potential for strength in the US economy to trigger inflation increases. Recent data revealed that consumer price index inflation remained stubborn in November, and the labor market continued to display strength.

While higher rates increase the opportunity cost of investing in gold, which impacted the precious metal negatively over the past year, the prospect of lower rates coincides with growing optimism about a soft landing for the US economy. Additionally, any further deterioration in global economic conditions, particularly in Europe and China, could drive safe-haven demand for gold.

The Australian Dollar continued its upward trajectory for the second consecutive day, delivering its most robust performance in four months following the release of moderate employment data from Australia. The AUD/USD pair gained ground, capitalizing on a significant decline in the US Dollar following the Federal Reserve (Fed) meeting.

Australia's Consumer Inflation Expectations for December eased to 4.5%, down from the previous figure of 4.9%. The seasonally adjusted Employment Change for November showed substantial improvement, reaching 61.5K compared to the expected 11.0 K. However, the Unemployment Rate rose to 3.9% from the previous 3.7%.

The US Dollar Index faced downward pressure after the release of downbeat Producer Price Index (PPI) data for November on Wednesday. The US Bureau of Labor Statistics reported that the PPI (YoY) grew by 0.9%, falling short of the expected 1.0%, while the Core PPI came in at 2.0% against the anticipated 2.2%. Market participants are likely to closely monitor the release of US Retail Sales data on Thursday.

The Japanese Yen extends its three-day appreciation streak against the US Dollar, reaching its highest level since late July during the Asian session on Thursday. A report suggesting that the Bank of Japan (BoJ) might exit its negative rate policy sooner than expected, possibly between January and March, significantly contributes to the JPY's upward momentum. Concurrently, the USD is under pressure following the Federal Reserve's (Fed) dovish shift, indicating the end of its policy-tightening campaign on Wednesday. This led to an overnight slump in US Treasury bond yields, narrowing the US-Japan rate differential and further supporting the JPY.

The EUR/USD pair undergoes a surge, reaching the 20-day Simple Moving Average (SMA), but encounters resistance around the 1.0900 level. The upcoming monetary policy meeting of the European Central Bank (ECB) is anticipated to result in unchanged interest rates, with attention focused on hints for 2024, particularly regarding the timing of potential interest rate cuts.

GBP/USD rallies after the Fed meeting, achieving one-week highs above 1.2600. The technical outlook suggests the potential for further gains, with the key support level remaining at 1.2500. The Bank of England's upcoming monetary policy announcement is not expected to bring changes to interest rates.