Fed's Dilemma: Rate Hike or Cut Amid Soaring Inflation Expectations

On Thursday (October 10th), RBC's asset management company stated that given the policy platforms proposed by both U.S. presidential candidates will stimulate inflation, the Federal Reserve may have to raise interest rates next year. It is expected that the U.S. bond breakeven rates will further expand. As the yield on long-term U.S. Treasury bonds rises faster than that on short-term bonds, the U.S. Treasury yield curve will steepen sharply. This is because investors will demand a higher premium to compensate for the inflation outlook, especially in the case of Trump winning the election next month. Although the possibility of the Federal Reserve lowering interest rates once or twice more is not ruled out, if there is a clear indication that Trump's policies on tariffs, immigration restrictions, tightening the labor market, and providing further fiscal stimulus are more inflationary, it is difficult to ensure that the Federal Reserve will not discuss raising interest rates next year.

After a series of recent data indicated that the U.S. economy was unexpectedly strong, investors significantly reduced their expectations for the Federal Reserve to lower interest rates, leading to a rebound in inflation expectations. The U.S. five-year bond breakeven rate climbed after falling to its lowest level since 2020 last month. The U.S. Dollar Index rose to 102.90; non-U.S. currencies retraced, with the Australian dollar reaching 0.6720 against the U.S. dollar, the euro fell to around 1.0940 against the U.S. dollar, and the offshore renminbi reached 7.08. Spot gold fell to near 2609 U.S. dollars, and spot silver came to near 30.40 U.S. dollars. Crude oil rebounded to near 73.80 U.S. dollars.

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Fundamentals: The Governor of the Bank of Greece stated on Wednesday that the eurozone's inflation rate is expected to reach the European Central Bank's 2% target in the first half of 2025, which strengthens the rationale for policymakers to lower highly restrictive interest rates at a faster pace than previously anticipated. This follows the latest economic activity and inflation data in the eurozone, which were far below expectations. Even if there is a 25 basis point rate cut now and another cut in December, the rate will only return to 3%, still in a highly restrictive territory.

Technical Analysis: The euro against the U.S. dollar is consolidating downward at the H4 level and is operating below the 48-day moving average. In addition, the MACD lines and volume bars are converging below the zero axis. Compared to the European Central Bank's September forecast, inflation is falling faster, and the latest data suggest that the rate may be reduced to 2% in the first quarter of 2025.

Resistance and Support Levels:

First Resistance Level: 1.0990 First Support Level: 1.0880

Second Resistance Level: 1.1040 Second Support Level: 1.0830Fundamentals: Data indicates that due to the uncertainty surrounding the UK's prospects, the yield gap between UK and German government bonds has widened to a 13-month high of 194 basis points. According to the senior European interest rate strategist at TD Securities, the UK's pace of interest rate cuts and government spending plans may impact the economy. Policy uncertainties in fiscal and monetary aspects have severely affected the pound exchange rate. Additionally, a survey of accountants revealed a decline in UK business confidence due to concerns over the impact of taxation on investment.

Technical Analysis: The British pound against the US dollar is consolidating at lower levels on the H4 chart and is trading below the 48-day moving average. Moreover, the MACD lines and volume bars have begun to expand below the zero axis. The impact of taxation echoes similar concerns from business groups before the release of the first budget by the UK's new Labour government.

Resistance and Support Levels:

First Resistance Level: 1.3120 First Support Level: 1.3010

Second Resistance Level: 1.3170 Second Support Level: 1.2960

Fundamentals: The stance of Shigeru Ishiba is expected to encourage market participants to rebuild their yen short positions, as the Bank of Japan (BOJ) is likely to face increased political pressure to slow down its rate hike pace. In August of this year, market expectations for the Federal Reserve to ease monetary policy rose due to concerns over a slowdown in the US economy, while the BOJ began to raise interest rates, narrowing the interest rate gap with the US. The so-called carry trade was severely impacted, and bets financed with the yen were brutally closed out.

Technical Analysis: The US dollar against the Japanese yen is experiencing a rebound on the H4 chart and is trading above the 48-day moving average. Additionally, the MACD volume bars and lines are converging above the zero axis. Due to the statements of Japan's new prime minister and the BOJ governor, the possibility of the BOJ raising interest rates in the short term may significantly decrease, leading to a relative depreciation of the yen and a slight increase in volatility in the Japanese stock market.Resistance and Support Levels:

First Resistance Level: 150.00 First Support Level: 148.30

Second Resistance Level: 150.80 Second Support Level: 147.50

Fundamentals: The minutes from the Reserve Bank of Australia's meeting indicate that the bank will maintain the interest rate at its current 12-year high until it is confident that inflation is moving sustainably towards the target. This suggests that the bank is still some distance away from easing its policy. The minutes released this week for the September 23-24 meeting show that the Monetary Policy Committee discussed scenarios where future policy would need to remain restrictive for an extended period or be tightened further. The meeting also assessed scenarios that might require easing of policy.

Technical Analysis: The AUD/USD is experiencing a pullback on the H4 timeframe and is trading below the 48-day moving average. Additionally, the MACD lines and volume bars have begun to expand below the zero axis. Amidst high inflation in Australia and as other parts of the world are slowly entering an easing cycle, these minutes highlight the challenges faced by the decision-makers at the Reserve Bank of Australia.

Resistance and Support Levels:

First Resistance Level: 0.6770 First Support Level: 0.6680

Second Resistance Level: 0.6710 Second Support Level: 0.6640Fundamentals: On Wednesday, gold prices fell for the sixth consecutive trading day, hovering near the two-week low touched in the previous session, as market participants' expectations for a significant rate cut diminished and attention turned to the Federal Reserve meeting minutes and inflation data. Despite gold being favored, the gold rally now appears to be getting tired, with investors anticipating some pullback and taking some profits off the table. Gold has been one of the best-performing assets this year, compared to the S&P 500, which has risen by 20% this year.

Technical Analysis: Gold continues to retreat at the H4 level and operates below the 48-day bull-bear line. Additionally, the MACD lines and volume bars converge below the zero axis. There are many factors driving the surge in gold demand, such as geopolitical and economic instability, which often trigger market demand for safe-haven assets like gold.

Resistance and Support Levels:

First Resistance Level: 2628.00 First Support Level: 2590.00

Second Resistance Level: 2646.00 Second Support Level: 2572.00

Fundamentals: Data from the American Petroleum Institute shows that U.S. crude oil inventories surged by nearly 11 million barrels, significantly higher than expected. The U.S. Energy Information Administration has revised down its 2025 oil demand growth forecast to 1.2 million barrels per day due to weak global economic prospects. The geopolitical risk premium in the oil market has slightly decreased this week, following a spike in crude oil implied volatility and options market activity last week due to conflicts in the Middle East, with perceived risks having subsided.Technical Analysis: Crude oil has rebounded from a bottom at the H4 level and returned close to the 48-day bull-bear line. Additionally, the MACD lines and volume bars are converging further near the zero axis. Weak demand fundamentals and an increase in US crude oil inventories have overshadowed the risks posed by Middle East geopolitical tensions and potential supply disruptions from Hurricane Milton.

Resistance and Support Levels:

First Resistance Level: 76.00 First Support Level: 71.00

Second Resistance Level: 78.00 Second Support Level: 69.00