50bps Fed rate cut in play; tech, USD lower, gold higher

* Dollar weighed down by speculation about a 50bps rate reduction

* Tech drags, banks shine as bets shift to jumbo Fed move

* Gold edges down from record high as yields break lower

* Ex Fed’s Dudley: The Fed should go big now. I think it will.

FX: USD sold off for a third straight day as expectations of a 50bps rate cut by the Fed on Wednesday gained more traction. Media reports from the Fed’s whisperer in chief, Nick Timiraos, plus comments from a former Fed official have seen bets on a bigger move rise to 65%, as at the time of writing. The index has now dropped to major support at 100.61. It seems the dovish bar is high for a break of this, though could it be third time lucky?  

EUR climbed higher up to the December top at 1.1139. After the very mildly hawkish ECB meeting last week, the move in the world’s most popular major is also being driven by falling US rates. That has seen the difference between two-year Euro/USD rates move to its narrowest since last May. We also heard from ECB officials yesterday who all say they are in no rush to ease, and December is likely to see the next move.

GBP outperformed with eyes on an on hold BoE rate decision, contrasting with the Fed and other major central banks. There is currently less than a 25% of another rate cut by the MPC on Thursday. Services inflation and wages are still too elevated for more action. The top in cable is 1.3261/66.

USD/JPY dipped to a fresh cycle low at 139.57 before paring losses and settling above 140 and a long-term Fib retracement level (61.8%) of the 2023 low to 2024 high at 140.48. The BoJ is expected to stand pat on rates at its meeting on Friday, though Governor Ueda is likely to talk hawkishly.

AUD moved higher even on the back of disappointing China data over the weekend. It showed China’s industrial output growth slowed to a five-month low in August, while retail sales and new home prices weakened further, bolstering the case for aggressive stimulus to shore up the economy and help it hit its annual growth target. USD/CAD again traded around the 200-day SMA at 1.3588 in a relatively narrow range. The 38.2% Fib level of the August drop is at 1.3631.

US Stocks: Stocks were mixed with more underperformance by tech and outperformance by financials and energy sectors. The S&P 500 gained 0.13% to settle at 5,633. The tech-dominated Nasdaq 100 lost 0.47% to finish at 19,423. The Dow closed 0.55% higher at 41,622. The benchmark S&P 500 is now up 4.15% over the six consecutive days to its fifth highest close in history. The Dow notched a record high while the flip side saw only three of the Mag 7 end the session in the green. Apple closed down 2.8% on concerns over weaker iPhone 16 demand.

Asian stocks: Futures are in the green. Asian stocks were mixed with Japan, mainland China and Korean markets closed for holiday. The ASX 200 was helped by financials and real estate. The Hang Seng was dragged lower by property developers as China data came in lower than expected with house prices dropping.

Gold made new record highs at $2589 after its upside breakout last week. We always say the more prices trade sideways the bigger the breakout will be. That’s essentially range contraction switching to range expansion. The falling dollar and yields due to a 50bps Fed rate cut underpin buying, plus a small haven bid.

Day Ahead – US Retail Sales, Canada CPI

Analysts expect US retail sales to rise +0.1% m/m in August, down from the previous +1.0%. The ex-autos measure is seen rising +0.3% m/m, one-tenth lower than the July print. Consumer spending remains solid with services spending momentum stronger than goods. Economists say housing cost inflation is easing and rental payments have flattened out. This data may be looked through quickly as attention turns to the FOMC meeting.

Canada publishes CPI estimates for August with the annual reading estimated to print a few tenths below the prior 2.5%. Not much will hang on this one reading from a Bank of Canada standpoint, though it may well impact market volatility. That is because it is one of two inflation readings before the BoC’s next decision on October 23 when they deliver fresh forecasts. Governor Macklem recently stated that if inflation continues to ease in line with the July projections, it would be reasonable to expect further interest rate reductions.

Chart of the Day – USD/CAD Bull Flag?

Markets have seen a litte bit of a stalemate recently in this major. Traders are worried perhaps that a more aggressive Fed rate cut could open the door for a similar move by the BoC. More rate cuts are priced in by money markets, but not jumbo-sized moves.

Technically, prices have tracked in a tight range with building upside risks in a bullish consolidation pattern. That said failure to hold the break above the 200-day SMA at 1.3588 last week is a mild USD-negative. Short-term technical resistance is 1.3631 which is the 38.2% retracement of the USD’s August drop. The midpoint of this move is 1.3695. Support is 1.3556.