US Equities Dip as Powell Signals Continued Inflation Battle, GBP Faces Pressure, and Gold Struggles | Daily Market Analysis

Key events:

• UK - GDP (MoM) (Sep)
• UK - GDP (YoY) (Q3)
• UK - GDP (QoQ) (Q3)
• USA - Michigan Consumer Expectations (Nov)
• USA - Michigan Consumer Sentiment (Nov)
• USA - FOMC Member Bostic Speaks
• USA - Fed Logan Speaks

On Thursday, US equities took a dip as Federal Reserve Chairman Jerome Powell conveyed that current monetary policy was still not restrictive enough to effectively combat inflation, dashing investors' hopes of concluding the Fed's rate-hiking cycle.

The Dow Jones Industrial Average saw a decline of 187 points, equivalent to a 0.6% drop, while the S&P 500 and the NASDAQ Composite both experienced similar losses, each down 0.6%.

Powell's remarks indicated that the Federal Open Market Committee remained uncertain about achieving the necessary policy tightness to meet the Fed's 2% inflation target. He did underline that future monetary policy decisions would be approached cautiously, but he also noted the willingness to tighten policy further if deemed necessary. This declaration deflated the optimism that had been building around the idea that the Fed's rate hikes were coming to an end.

Treasury yields maintained their upward trajectory, with the 2-year Treasury yield increasing by approximately 12 basis points to 4.64%.

In labor market news, new jobless claims were in line with expectations, registering 217,000 claims last week, a slight decrease from the prior week.

Consumer stocks, led by a 6% slump in Tesla Inc (NASDAQ: TSLA), experienced a downturn after HSBC issued a sell rating for the electric vehicle manufacturer. HSBC raised concerns that Tesla might face delays in executing its plans and emphasized the significant risk associated with CEO Elon Musk's influential role in the company. HSBC set a price target of $146 for the company.

The US dollar strengthened on Thursday, reaching a one-week high against the Japanese yen in response to Jerome Powell's comments. Traders remained vigilant for possible interventions to support the ailing Japanese currency, which had touched a one-year low of 151.74 the previous week.

The dollar had previously benefitted from the recent surge in Treasury yields, but its value declined last week as yields experienced a sharp drop. This shift was triggered when Powell's comments following the Fed's two-day meeting were interpreted as dovish, and soft jobs data added to the belief that the Fed had concluded its interest rate hikes.

Although some Fed officials adopted a more hawkish stance this week, emphasizing that further rate hikes were still on the table if inflation did not move closer to the Fed's 2% annual target, traders remained attentive to the Japanese yen's performance and the possibility of intervention by Japanese authorities.

Worries over currency pair interventions had led some investors to bet on the yen weakening further against the euro rather than against the US dollar. The euro reached a 15-year high of 161.80 on Thursday.

Additionally, the Australian dollar fell to a one-week low of $0.6364, as it continued its decline following the Reserve Bank of Australia's recent decision to raise interest rates to a 12-year high, despite downplaying the likelihood of further increases.

The United Kingdom is set to unveil its Q3 Gross Domestic Product (GDP) preliminary estimate on Friday. Before this announcement, the Pound Sterling was facing downward pressure in its exchange with the American dollar, with GBP/USD trading around the 1.2300 mark after reaching a monthly peak at 1.2427.

Market participants are closely scrutinizing central bank communications, as most central banks have momentarily halted their monetary tightening efforts. The post-coronavirus economic recovery resulted in an unexpected surge in global inflation, catching policymakers by surprise. Consequently, early in 2022, central banks embarked on an aggressive course of monetary tightening, which proved effective in containing inflationary pressures well into 2023. However, inflation levels continue to exceed central banks' targets, and central banks worldwide are reaffirming their commitment to combat persistent inflation.

Meanwhile, the price of gold is grappling with challenges as it struggles to capitalize on the previous day's modest rebound from the $1,944 level, which marked a three-week low.

Gold is currently trading above the $1,955 mark, but it is on course for its most challenging week in over a month due to the recent resurgence of the US Dollar. The USD has been recovering from its lowest level since September 20, which it reached on Monday.

In the upcoming session on Friday, investors will closely monitor the Michigan consumer sentiment and expectations surveys, and UK GDP, along with speeches from Bostic and Logan.