The U.S. dollar stabilized on Tuesday after a four-day slide, as market participants ramped up expectations that the Federal Reserve will implement a significant half-point interest rate cut at Wednesday’s meeting. The currency had been under pressure as traders grappled with mixed U.S. economic data highlighting weakening growth but persistently elevated inflation which has left investors divided on the scale of the Fed’s policy response.
A key piece of data still to come is the U.S. retail sales report for August, set to be released later today. The results are expected to provide critical insight into the Fed’s decision-making. Should retail sales disappoint, markets are likely to fully embrace the possibility of an aggressive 50 basis point cut, reinforcing the idea that the central bank will take more decisive action to support growth. However, a stronger-than-expected report may not be enough to dramatically reverse expectations for a dovish Fed stance.
Yen Maintains Momentum Ahead of BoJ Meeting
The yen held steady on Tuesday, following its significant advance beyond the 140-per-dollar mark for the first time since July 2023, continuing its rally from near four-decade lows seen earlier in the year. Market attention is now shifting to the Bank of Japan’s upcoming policy meeting, where any signals from Governor Kazuo Ueda suggesting a potential rate hike in October could put additional downward pressure on USD/JPY. Though the BoJ is widely expected to hold rates steady on Friday, having already raised rates twice this year, any hints of further tightening could trigger renewed yen strength and weigh on Japanese equities.
Precious Metals Shine as Gold Nears Record Levels
In commodities, gold continued to hover near record highs as traders bet on a softer U.S. dollar and falling Treasury yields in the wake of the Fed’s anticipated policy shift. The prospect of a weaker dollar, combined with lower real interest rates, has bolstered the appeal of non-yielding assets like gold, which is seen as a safe haven in times of monetary easing.
Other precious metals also posted gains, with silver extending its upward streak to seven consecutive sessions, nearing the $31-per-ounce mark a level not seen since 2019. The rally in silver, driven by expectations of continued dollar weakness and increased industrial demand, is on track for its longest run of daily gains in five years. Meanwhile, oil prices edged higher, supported by broader market optimism and tightening supply concerns.
Outlook
With the Federal Reserve set to announce its rate decision on Wednesday, financial markets are bracing for heightened volatility. Investors are keenly focused on how the Fed balances the need to support a slowing economy against the backdrop of stubbornly high inflation. In parallel, the Bank of Japan’s stance later in the week will be pivotal for currency markets, especially the yen, which could see renewed strength if policymakers signal further tightening ahead. Precious metals, particularly gold and silver, remain poised to benefit from any dovish shifts in U.S. monetary policy, while oil prices could gain additional momentum from ongoing supply concerns.