Global Shares Decline, Dollar Recovers as Fed Pauses Rate Hikes; ECB Announcement and BOJ Meeting Awaited | Daily Market Analysis

Key events:

• New Zealand - GDP (QoQ) (Q1)
• Eurozone - Deposit Facility Rate (Jun)
• Eurozone - ECB Interest Rate Decision (Jun)
• USA - Core Retail Sales (MoM) (May)
• USA - Initial Jobless Claims
• USA - Philadelphia Fed Manufacturing Index (Jun)
• USA - Retail Sales (MoM) (May)
• Eurozone - ECB Press Conference

On Wednesday, global shares experienced a decline, while the dollar managed to recover some of its losses. This occurred after the US Federal Reserve, in line with expectations, decided to halt its interest rate hikes. However, it also indicated the possibility of raising rates by an additional half a percentage point before the end of the year.

In its latest two-day meeting, the central bank released new economic projections that indicated a probable increase of half a percentage point in borrowing costs by the conclusion of 2023. This projection was attributed to a stronger-than-anticipated economy and a slower decrease in inflation.

The Federal Open Market Committee, responsible for setting interest rates, stated unanimously in its policy statement that maintaining the current target interest rate range during this meeting would enable the committee to evaluate further information and its implications for monetary policy.

Although the market had widely expected the US Federal Reserve to pause its rate hikes, the focus was primarily on communication regarding potential future increases. In a surprising turn, the participants of the Federal Open Market Committee (FOMC) displayed a more hawkish stance. The median forecast for the end of 2023 regarding the Federal Funds rate increased by 50 basis points to a range of 5.50% to 5.75%.

After the announcement, the closing results of the stock market were a mixed bag. The Dow Jones index concluded the day with a decline of over 230 points. In contrast, the S&P 500 index managed to secure a gain of 0.1%, and the Nasdaq index experienced a more substantial increase of 0.4%. Notably, the Nasdaq Composite index was predominantly boosted by the positive performance of AI-related stocks such as Nvidia and AMD.

Also, Wednesday commenced with Bitcoin surpassing the $26,000 mark; however, it has subsequently retraced and hit a 24-hour low of $25,791. There are speculations among analysts that it may inevitably drop further to $25,000. This sentiment is influenced by recent discussions on cryptocurrency regulation dominating the news.

In contrast, gold prices initially experienced an increase, reaching $1959 per ounce during the session. However, as Asian traders begin their day, the price of gold continues its downward trend, approaching the $1,930 mark. This negative reaction is in response to the hawkish outlook of the US Federal Reserve (Fed), which has given a boost to the United States Dollar (USD). The market sentiment is currently favoring the USD, leading to a decline in the price of gold. 

The dollar has exhibited a decline across various currencies, with the DXY index down by 0.32%. The New Zealand dollar (NZD) has witnessed the most significant movement, rising by over one percent and reaching a three-week high of $0.6211. The Euro (EUR) and the British Pound (GBP) recorded more modest gains of 0.39% each.

Despite the release of better-than-expected exports and machinery orders data, the Japanese yen experienced a decline of 0.9%, leading the losses in Asia.

The market's attention was primarily focused on the upcoming Bank of Japan (BOJ) meeting scheduled for Friday. It is widely anticipated that the central bank will continue its ultra-loose monetary policy as a means to support domestic growth. This stance is expected to have a positive impact on Japanese stocks.

However, the yen is likely to face further selling pressure due to rising interest rates in other parts of the world, diminishing its attractiveness.

BOJ officials, especially the new Governor Kazuo Ueda, have indicated their intention to maintain the bank's yield curve control policy in order to provide support for the local economy.

Additionally, the decreased expectation of Japanese government intervention in stabilizing currency markets has contributed to the weakening of the yen. Although officials have issued verbal warnings, no concrete actions have been taken thus far.

Currently, traders are directing their focus toward the upcoming monetary policy announcements of the European Central Bank (ECB) scheduled for later in the day at 12:15 GMT. It is widely anticipated that the ECB will implement a 25 basis points increase in key rates. However, the Staff Economic Projections and the subsequent press conference by President Christine Lagarde will play a crucial role in determining the future policy direction.

Market expectations suggest that interest rates will reach their peak in July, with speculation of an additional rate hike following June's increase, followed by a potential pause in September. If the ECB delivers a more hawkish stance by implementing a rate hike, it is likely to exert additional selling pressure on the price of gold.