The Fed has cut its benchmark interest rate by 25 basis points to 4.25% – 4.50%, and Fed officials signaled that they may pause rate cuts in the coming year due to stable labor markets and inflation. The yield on the 10-year US Treasury note rose 6.1 basis points to 4.446%, a four-week high, after the Fed rate cut.
“The Fed has raised its core inflation forecast and adjusted the dot plot; therefore, further rate cuts are being reconsidered, and I think that in the coming year, there will only be one more rate cut, which is much less than previously predicted,” said Axel Merk, president and chief investment officer at Merk Hard Currency Fund in Palo Alto, California.
The latest forecast from the US Federal Reserve shows that there will be two 0.25 percentage point rate cuts in the coming year as inflation rises. This forecast aligns with a “wait-and-see” approach as President-elect Donald Trump returns to the White House in January.
Mr. Powell said Fed policymakers wanted to see more progress in lowering inflation as they consider future rate cuts.
The market now predicts that the Fed will keep the overnight benchmark rate unchanged at the policy meeting on January 28-29. Higher interest rates reduce the appeal of holding non-interest-bearing assets such as gold.
“So the market’s initial reaction is that the Fed is becoming more hawkish, and that’s dollar-positive,” said Axel Merk.
The US dollar rose 0.89% to 0.90020 against the Swiss franc, after hitting 0.90150 – the highest since July. The euro fell 1.17% to $1.03695, a three-week low.
The Dollar Index, which measures the greenback against six major peers, rose to 108.260, hitting a high not seen since November 2022, right after the Fed announcement. At the end of the session, the index was still up 1.08% at 108.08.
Fed Chairman Jerome Powell said in a press conference after the meeting that “it’s time to cautiously adjust interest rates and watch the progress of inflation,” adding that the labor market is slowing down.
The dollar rose to a 15-and-a-half-year high against the South Korean won on December 18, reaching 1,454.41 – the highest since March 2009. At the end of the session, the index rose 1.03% to 1,452.19 KRW.
The dollar rose 0.78% against the Japanese yen to 154.63 JPY, a three-week high. The Bank of Japan is expected to keep interest rates unchanged on Thursday.
The Bank of England is also expected to keep interest rates unchanged on Thursday. The pound fell slightly against the euro and the US dollar after the Fed’s decision. The pound weakened 0.98% to $1.25860, a three-week low.
The Swedish Riksbank is expected to cut interest rates by 0.5 points, while the Norges Bank is expected to keep rates unchanged. The Norwegian krone fell 1.54% to 11.3677 NOK, while the Swedish krona weakened 1.38% against the dollar to 11.1087 SEK/USD.
The Australian dollar fell to AUD 0.62225, the lowest since October 2022. The New Zealand dollar touched a two-year low of NZD 0.56540.
The Chinese yuan fell to a near 13-month low against the US dollar on Wednesday. The currency has faced renewed depreciation pressure from escalating trade tensions and a widening yield disadvantage. The yield gap between the 10-year government bonds of China and the US has widened to the largest in 22 years this week, putting pressure on the yuan.
The onshore yuan fell 0.02% to 7.2853 CNY/USD in the afternoon of December 18, not far from the 13-month low of 7.2996 touched earlier this month. Offshore, the yuan traded at 7.2895 CNH/USD.
Bitcoin fell by as much as 5% after Mr. Powell said the Fed did not want to be part of any government effort to hold large amounts of the world’s largest cryptocurrency. Bitcoin fell 5.34% to $100,734.
Gold prices also fell more than 2% to a one-month low on Wednesday after the US Federal Reserve cut interest rates as expected but noted that this would slow the pace of further declines in borrowing costs, boosting the dollar and bond yields.
Gold prices fell 2.1% to $2,589.91 an ounce, the lowest since November 18. February 2025 gold futures fell 0.3% to $2,653.30.
The gold market is worried again as Fed Chairman Jerome Powell agrees with the view of slowing the pace of rate cuts based on the progress of inflation over the past time. Therefore, the upcoming release of US core PCE inflation data (core inflation) has become the focus of the market.
Traders are now watching important US GDP and inflation data to be released at the end of this week, which could further shape the monetary policy outlook.
Reference: Reuters
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