The Fed kept rates unchanged while also trimming hopes for a March cut, and this weighed on the commodities complex yesterday. Meanwhile, a bearish weekly oil inventory report from EIA added to the downward pressure on the oil market. Energy – Crude Oil retreats Crude oil prices retreated sharply yesterday amid broader negative sentiment in the market after the Federal Reserve left rates unchanged and dashed hopes for a rate cut anytime soon. ICE Brent front-month contract has been trading at around US$80.2/bbl as of the time of writing, down around 5% since making its peak earlier in the week. The EIA weekly oil report was somewhat bearish for oil prices. US commercial crude oil inventories increased by 1.2MMbbls for the week ended on 26 January, the first increase in over three weeks. The market was anticipating a drawdown of around 0.2MMbbls, while API reported a decline of 2.5MMbbls. However, when factoring in the SPR releases, the build was even larger, with total US crude oil inventories increasing by around 2.1MMbbls. Total US commercial crude oil stocks now stand at 422MMbbls, still around 5% below the five-year average. The unexpected build in the stocks could be largely attributed to the slowing refinery operations due to lingering winter storm outages and planned refinery maintenance. Refinery operating rates in the country continued to decline and dropped by 2.6% over the week to 82.9% as of 26 January. As for refined product inventories, gasoline inventories increased by 1.16Mbbls, against a forecast for an addition of 2.34MMbbls. Distillate stockpiles fell by 2.54MMbbls last week, compared with expectations for a drawdown of 347Mbbls. A Reuters survey showed that OPEC output dropped by a sharp 410Mbbls/d over January to 26.33MMbbls/d as Libya faced disruption at one of its major oil fields, whilst some other countries also lowered production for the month. However, output is still higher than OPEC's targeted levels as some countries including Iraq, Nigeria and Gabon pump more than the agreed quota. Metals – LME aluminium cancelled warrants rise Gold held steady while industrial metals edged lower this morning as the latest comments from the Federal Reserve dashed hopes of an interest rate cut in March. Meanwhile, base metals were further pressurised on slowing demand concerns in China ahead of the Lunar New Year holiday next weekend. LME data shows that cancelled warrants for aluminium jumped 17,575 tonnes (the biggest daily addition since 9 January) for a second consecutive day to 219,000 tonnes as of yesterday, the highest since 21 December. The increase was driven by warehouses in Kaohsiung Port, Taiwan. Aluminium on-warrant inventories fell by 17,825 tonnes for a second straight session to 318,575 tonnes, while exchange inventories fell by 250 tonnes for a third consecutive day to 537,575 tonnes as of yesterday. Net inventories outflows for the January month stood at 11,475 tonnes, compared to the net inflows of 89,675 tonnes seen in December last year. As for copper, the latest data from the National Statistics Institute of Chile shows that domestic copper output increased 11.4% month-on-month (flat compared to year-ago levels) at 495.5kt in December driven by strong growth in the manufacturing and mining sectors. Meanwhile, cumulative copper output continued to remain weak and fell 1.7% year-on-year to 5.27mt in the whole of 2023, due to a series of operational issues this year. In zinc, recent reports suggest that Boliden plans to slash operations and reduce output at its Tara zinc mine in Australia when it restarts this year. Earlier in June, the mine was put on care and maintenance when the zinc prices touched three-year lows. Boliden plans to resume the mine operations in the second quarter of this year, with new conditions which include a one-week closure for the mill every three weeks and a production target of 180kt of zinc concentrates a year. Tara is Europe's largest zinc mine, with zinc concentrate output at more than 300ktpa when operating at its peak. Agriculture – ISMA revises sugar output estimates Recent estimates from the Indian Sugar Mills Association (ISMA) show that gross sugar production (including sugar diverted for ethanol production) in India could rise to 33.05mt in 2023/24, compared to its previous forecast of 32.5mt. However, it is lower than the 36.6mt produced for the last year. Sugar production after ethanol diversion is expected to fall to 31.4mt in 2023/24 when compared to 32.82mt produced a year earlier. Sugar allocation for ethanol production stood around 1.7mt for the 2023/24 season, while ISMA expects the government to allow the diversion of around 1.8mt of sugar this year. Sugar consumption in the nation is expected to average around 28.5mt this year. Meanwhile, 2023/24 ending stock estimates for the nation rose to 8.45mt, compared to 5.6mt a year ago. The group added that around 520 mills were crushing cane as of January...

EUR/USD trades slightly below 1.0800 in the European morning on Thursday. The US Dollar continues to gather strength following the Fed policy announcements. January inflation report from the Euro area and mid-tier US data releases will be watched closely. EUR/USD made sharp moves in both directions in the American session on Wednesday before closing the day marginally lower. The pair stays under modest bearish pressure early Thursday and trades below 1.0800 in the European morning.

Gold price looks to revisit two-week highs above $2,050 early Thursday. US Dollar and Treasury bond yields look to US jobs data after the hawkish Fed.    Gold price confirmed a triangle breakout amid a bullish daily RSI. Gold price is back in the green, on its way to retest the two-week high of $2,056 set on Wednesday. The US Dollar (USD) is fading its uptick amid a renewed appetite for risk assets, as markets cheer China's fiscal support while assessing the US Federal Reserve (Fed) interest rate outlook. Gold price regains poise, as focus shifts to US jobs data China's Vice Finance Minister Wang Dongwei announced on Thursday that they "will appropriately increase investment under the central government budget", which "will help expand domestic demand." This comes after China's Caixin Manufacturing Purchasing Managers Index (PMI) remained at 50.8 in January, suggesting a steady growth in the country's manufacturing sector. The market consensus was for a 50.6 reading. The further boost to risk sentiment in Asia faded the uptick in the US Dollar, motivating Gold buyers to regain control. Additionally, the persistent weakness in the US Treasury bond yields across the curve is also helping the non-yielding Gold price to recover lost ground. US Treasury bond yields came under the bus on Wednesday and smashed the US Dollar alongside after the ADP Employment Change data came in below estimates at 107K and following the Treasury Department's quarterly announcement that it would sell $121 billion in notes and bonds next week, up from $112 billion last quarter.  However, a relatively hawkish tone delivered by the Fed, following the conclusion of its two-day policy meeting, failed to offer any respite to the US Treasury bond yields while the US Dollar jumped on the Fed's pushback against a March rate cut. The US central bank extended the pause, as Fed Chair Jerome Powell said "based on the meeting today, I don't think likely we will have a rate cut in March." Markets are currently pricing in a 35% probability that the Fed will cut rates in March while for May the odds stand at 92%. All eyes now turn toward Friday's US Nonfarm Payrolls data to affirm the pushback to May for the Fed to lower the interest rates. Ahead of that, traders will look to the US Jobless Claims, Unit Labor Cost (Q4) and the ISM Manufacturing PMI data for fresh trading impetus in Gold price. The upcoming data could help reprice the market's expectations for the dovish Fed pivot. Gold price technical analysis: Daily chart As observed on the daily chart, Gold price confirmed an upside break from a month-long symmetrical triangle formation after closing convincingly above the falling trendline resistance at $2,036 on Wednesday. The 14-day Relative Strength Index (RSI) indicator points north above the midline, suggesting that there is enough room for the upside. Traders have paid little attention to the Bear Cross validated on Tuesday after the 21-day Simple Moving Average (SMA) crossed the 50-day SMA from above on a daily closing. With the bullish bias likely intact in Gold price, the immediate strong resistance is seen at the previous day's high of $2,056, above which the December 12 high of 2,062 wil be tested. Further up, the $2,070 round figure could challenge bearish commitments. On the downside, powerful support continues to remain at the $2,030 region, where the 21- and 50-day Simple Moving Averages (SMA) hang around. Acceptance below the latter could reinforce the selling interest for a test of the triangle support at $2,016. If the downside momentum gains traction, a test of the key $2,000 threshold could be in the offing.  

The Fed maintained its monetary policy unchanged, as widely expected. Powell signalled optimism on inflation but pushed back on March cut. We still stick to our call for a first cut in the next meeting, and will focus on labour supply and leading growth data during the intermeeting period. Phasing out QT will also be discussed more in-depth in March, no new signals today. EUR/USD price action around the FOMC meeting should be viewed in light of the drop in US rates following renewed concerns about the health of US regional banks. In the end, EUR/USD finished close to the 1.08 level and about flat on the day, we still look for 1.07 in 6M and 1.05 in 12M. The Fed remains firmly 'in a risk management mode' as it continues to make progress on both sides of the dual mandate. Powell struck an optimistic tone on inflation, stating that data seen so far has been 'good enough' and that the Fed simply needs to see more similar evidence on disinflation in order to initiate the cutting cycle. There are two-sided risks to starting either too late or too early, but the cuts are ultimately on the way in any case. We stick to our call for a first cut in March followed by gradual quarterly reductions thereafter, as we think the approach still fits well with the Fed's risk management stance. Market prices in around 35% probability for the March cut. What would be needed for the Fed to opt for a cut already in the next meeting? Powell continued to emphasize recovering labour supply as a key factor balancing the labour market. The flow of workers from outside the labour force and into employment slowed abruptly in December (Chart 1), and we will see if the tide turned higher again in the Friday's Jobs Report. Powell was confident that housing inflation would continue to slow down as past moderation in rental price growth feeds into the official measures. According to the NY Fed's Multivariate Core estimate, sector-specific housing is clearly the most important contributor to underlying inflation, while other factors have already eased markedly, suggesting that further positive news on inflation might be on the way. We will also closely follow early indicators for growth. The uptick in January Flash PMIs rhymed well with the late-2023 easing in financial conditions, recovery in household real incomes and also Powell's comments on anecdotal evidence. That said, some regional manufacturing indices have flashed downside risks ahead of the ISM release tomorrow. On the balance sheet, Powell gave no concrete signals on the timing of QT endgame, and simply stated that the issue would be discussed more in detail in the next meeting. We still think that QT will likely continue at least until the end of 2024. EUR/USD price action around the FOMC meeting should be viewed in light of the rally ahead of the meeting triggered by renewed concerns about the health of US regional banks. In the end, EUR/USD finished close to the 1.08 level and about flat on the day as the market and the Fed remain undecided on the prospects of a cut in March. We keep our forecasts for EUR/USD unchanged at 1.07 on 6M and 1.05 on 12M.   Download the Full Report!

AUD/USD maintained the range bound trade unchanged. Disinflationary pressures gathered pace in the last part of 2023. The Federal Reserve left its monetary conditions intact, as expected. Once again, AUD/USD demonstrated volatile performance on Wednesday, remaining trapped in a side-lined theme that has persisted since the middle of this month. Following an initially auspicious start to the week, the Aussie dollar charted slight gains on a daily basis, always around the 0.6600 neighbourhood and aligning with the marked losses observed in the greenback. Meanwhile, the resilience of the Australian currency is noteworthy, especially given recent reports indicating potential additional stimulus measures by the PBoC to support China's stock market and foster economic recovery post-pandemic. Speaking about China, slightly positive results from the Manufacturing and Non-Manufacturing PMIs tracked by NBS for the month of January seem to have lent some legs to AUD, limiting the downside potential at the same time. On another front, the anticipated decision of the Reserve Bank of Australia (RBA) to maintain its current policy stance at its February 6 meeting is seen as a factor restricting the potential upward movement of the pair in the near term, likely leading to subdued trading in the short-term future. Underpinning this prospect, the latest inflation data in Australia showed that disinflationary pressures gathered extra steam towards the end of last year; both the Inflation Rate and the RBA's Monthly CPI Indicator rose (much) less than initially estimated by 4.1% in Q4 and by 3.4% in December, respectively. Collaborating with the pair's price action also emerged the key FOMC event, where the Federal Reserve matched the broad consensus and left its interest rates intact early on Wednesday. The greenback gathered pace and kept the downside pressure on the Aussie dollar after the Committee showed no rush to reduce its rates, as it needs further evidence that inflation is heading towards the bank's goal, at the time when Chair Powell almost ruled out an interest rate cut in March. A glimpse at the Australian docket notes that preliminary readings for Building Permits for the month of December are only due on Thursday. AUD/USD daily chart AUD/USD short-term technical outlook Further losses may cause the AUD/USD to retest its 2024 low of 0.6524 (January 17), which appears reinforced by the provisional 100-day SMA (0.6528) and by the December 2023 bottom. Extra weakness from here could put a probable visit to the 2023 low of 0.6270 (October 26) back on the radar ahead of the round level of 0.6200, all of which precede the 2022 low of 0.6169 (October 13). On the contrary, there is a temporary barrier at the 55-day SMA of 0.6644. The breakout of this zone may motivate the pair to set sails for the December 2023 high of 0.6871 (December 28), ahead of the July 2023 top of 0.6894 (July 14) and the June 2023 peak of 0.6899 (June 16), all preceding the key 0.7000 yardstick. No changes to the consolidative phase are seen on the 4-hour chart. On the bullish side, there is an immediate hurdle at 0.6624 ahead of the 200-SMA at 0.6684. The surpassing of this zone indicates a potential advance to 0.6728. On the flip side, there is initial support around 0.6551 before 0.6525. If this zone is breached, there is no significant dispute until 0.6452. The MACD remains flat around the positive line, and the RSI leaps past 52. View Live Chart for the AUD/USD

The Federal Reserve has left interest rates unchanged and removed language about further hikes.  Officials signaled rate cuts are not imminent, a hawkish twist. Investors are set to focus on data showing a slowdown, reversing the initial response. Markets do not like uncertainty – or the lack of confidence, which the Federal Reserve (Fed) has expressed. A deeper look at the bank's pushback reveals its weakness and could trigger a reversal. The Fed removed the part indicating further rate hikes may be needed, but that was obvious for months. Its last tightening came in July, and the December decision already included a major downgrade in expectations for further hikes. The "dot plot" indicated more cuts than they had previously forecast.  Yet removing the open door to hiking was balanced by a pushback against immediate hikes. Here is the critical passage: The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent The understatement is that officials cannot be confident that inflation is falling. Is this the case? According to the Fed's preferred inflation calculation, PCE, headline price rises slowed to 2.6%, while Core PCE is at 2.9%. This is within striking distance of the bank's goal of 2%.  More importantly, the Fed reiterates that it is data dependent, and there is plenty of data until March 20 – the next FOMC meeting. Another retreat in inflation may be sufficient to justify a rate cut. Moreover, the labor market is cooling, and if it suffers a cold, the Fed would slash rates instantly. Rising unemployment is undesirable.  I expect markets to act earlier. The pushback against cutting rates in March is only a slap on the wrist – not fully forced. The bank cannot commit to leaving rates unchanged in seven weeks from now, as anything and everything can change. All in all, markets respect the bank's hawkishness, but it will soon find the confidence Powell seems to lack – inflation and employment are cooling. That means expectations for lower rates, thus sending stocks and Gold back up, and the US Dollar down.