S&P 500 Ends Seven-Day Rally as Fed's Rate Cut Sparks Volatility | Daily Market Analysis

Key events:

• UK - BoE Interest Rate Decision (Sep)
• USA - Initial Jobless Claims
• USA - Philadelphia Fed Manufacturing Index (Sep)
• USA - Existing Home Sales (Aug)

The S&P 500 ended a seven-day winning streak with volatile trading on Wednesday, as the Federal Reserve opted for a substantial 50 basis point rate reduction, the first such cut since March 2020.

By the close of trading, the S&P 500 had declined by 0.3%. Similarly, the tech-driven Nasdaq Composite and the Dow Jones Industrial Average both dropped by 0.3%, with the Dow shedding 103 points.

Stocks initially rallied on news of the rate cut but later experienced significant fluctuations, ultimately closing in negative territory. On Wednesday, the US Federal Reserve began a policy-easing cycle with a substantial rate reduction, dampening expectations for further aggressive cuts in borrowing costs. This move is expected to drive US Treasury bond yields higher, which could support the US Dollar.

Speculation about a larger Bank of Canada rate cut may limit gains for the Canadian Dollar and ease losses for the USD/CAD pair. Tuesday’s inflation data, showing the smallest CPI increase since February 2021, has fueled dovish expectations. Technically, the pair shows potential for appreciation after breaking the 200-day Simple Moving Average and exiting a week-long trading range.

After reaching a one-month high, the USD/CAD pair pulled back to the 1.3600 level, as rising crude oil prices supported the Canadian Dollar. Despite early gains, improved market sentiment triggered selling pressure, suggesting caution before committing to further bearish moves.

In Asian trading on Thursday, gold prices gained traction, reversing a two-day losing streak and pausing the pullback from the record high set the previous day. This resurgence occurred as the US Dollar’s post-Fed recovery lost steam after reaching a one-week high, boosting demand for the safe-haven metal. Concerns about potential economic slowdowns in both the US and China, along with escalating tensions in the Middle East, further reinforced gold’s appeal.

The Australian Dollar reversed its earlier losses and extended gains against the US Dollar following Thursday's labor market report. Australia's Employment Change showed an increase of 47.5K jobs in August, a decline from July's 58.2K but well above the expected 25.0K. Meanwhile, the Unemployment Rate remained unchanged at 4.2%, in line with forecasts, according to the Australian Bureau of Statistics.

The Japanese Yen recovered some intraday losses but remained weaker against the US Dollar on Thursday. Despite the Fed’s aggressive rate cut, the risk-sensitive Yen continued to depreciate.

Looking ahead, traders are focused on the Bank of Japan’s policy decision on Friday, where rates are expected to remain unchanged, with room for future hikes. Japan’s National Consumer Price Index (CPI) data will also be in the spotlight, as it could provide further clues on the BoJ’s monetary policy outlook.

Market participants are now awaiting key US economic data, including the latest Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index, and Existing Home Sales, for further guidance on market direction.