Wall Street Gains as Investors Bet on Bigger Fed Rate Cut | Daily Market Analysis

Key events:

• Switzerland - PPI (MoM) (Aug)
• Eurozone - ECB's De Guindos Speaks
• Eurozone - Wages in euro zone (YoY) (Q2)
• Eurozone - Trade Balance (Jul)
• Eurozone - ECB's Lane Speaks
• USA - NY Empire State Manufacturing Index (Sep)

Wall Street’s major indices finished the week on a positive note, with investors focused on the possibility of a larger interest rate cut from the Federal Reserve in the upcoming week. Small-cap stocks, which are more sensitive to rate changes, led the market gains.

Speculation around the Fed’s rate cut fluctuated throughout the day, and by late Friday, opinions were almost evenly split. The probability of a 50-basis point cut surged to 49% from 28% the previous day, according to the CME's FedWatch Tool, which also showed a 51% chance for a 25-basis point cut.

By the close of trading on the NYSE, the Dow Jones Industrial Average rose by 0.72%, while the S&P 500 increased by 0.54%, and the NASDAQ Composite climbed by 0.64%.

Meanwhile, gold continued to edge higher for the third consecutive day, marking the first positive streak in six sessions. The precious metal reached a new all-time high, hovering around $2,589 during early Monday's Asian trading session. Traders have been factoring in the likelihood of a larger interest rate cut by the Federal Reserve amid signs of cooling inflation in the US, which has kept the US dollar near its year-to-date low seen in August. This has been a key driver supporting the non-yielding asset.

Additionally, ongoing political uncertainty in the US ahead of the November elections, along with persistent geopolitical risks, has further fueled demand for gold as a safe-haven asset. However, a generally upbeat sentiment in global equity markets has tempered gold’s upward momentum.

The USD/CAD pair struggles to build on its slight gains from the past two days, encountering renewed selling pressure during Monday's Asian session. Despite this, spot prices are holding above the 1.3565 support level, signaling caution before expecting any major pullback from last Wednesday's three-week high.

The US Dollar remains near its year-to-date low, fueled by growing speculation of a more aggressive policy easing by the Federal Reserve amid signs of easing inflation in the US. Additionally, a generally positive sentiment in equity markets is reducing demand for the safe-haven USD, adding downward pressure on the USD/CAD pair. However, the decline is limited by weaker Crude Oil prices, which typically weigh on the oil-linked Canadian Dollar.

Weaker-than-expected economic data from China over the weekend has heightened concerns about slowing fuel demand in the world’s second-largest economy and top oil importer. As a result, Crude Oil prices have been unable to build on last week's recovery from the lowest levels seen since May 2023. Meanwhile, expectations of additional interest rate cuts by the Bank of Canada could cap any significant gains in the Canadian Dollar, offering support to the USD/CAD pair.

In other currency markets, the Australian Dollar is inching higher against the US Dollar on Monday, buoyed by growing speculation that the US Federal Reserve may opt for a larger 50-basis-point rate cut at its upcoming monetary policy meeting. Traders are also awaiting Australian jobs data later in the week to gauge the state of the labor market and its implications for domestic monetary policy.

The Reserve Bank of Australia has maintained a hawkish stance, with Governor Michele Bullock emphasizing that it’s too soon to consider rate cuts given persistently high inflation. RBA Assistant Governor Sarah Hunter also noted that while the labor market remains tight, wage growth appears to have peaked and is expected to slow.

Meanwhile, NZD/USD is holding steady following recent losses, trading near 0.6160 during Monday's Asian session. Traders are processing data that shows a slight improvement in New Zealand’s business activity. The Business NZ Performance of Services Index (PSI) rose to 45.5 in August from 45.2 in July, its second consecutive monthly increase, though it remains in contraction territory.

The New Zealand Dollar faces headwinds from growing speculation that the Reserve Bank of New Zealand may take an aggressive approach to rate cuts. Having unexpectedly started its easing cycle in August, the RBNZ is expected to lower the Official Cash Rate (OCR) at each of its remaining policy meetings this year. Traders are also anticipating New Zealand’s Q2 Gross Domestic Product (GDP) data later this week for further clues on the direction of RBNZ’s monetary policy.

As the market braces for key central bank events this week - including the Federal Open Market Committee decision on Wednesday, followed by policy announcements from the Bank of England and the Bank of Japan later in the week - traders appear cautious, preferring to wait on the sidelines.