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Fed Raises Interest Rates, But Hiking Pause Uncertain

Market Update - Daniel Ang The Accidental Trader Traders Academy International 5

On May 4, 2023, the US Federal Reserve (Fed) raised interest rates by a quarter of a percentage point as expected, in response to the country’s strong labor market and high inflation. However, the central bank also signaled that it may pause further increases, which unsettled traders who were initially optimistic about the decision.

Fed Chairman Jerome Powell noted that the labor market is “very, very strong” and that inflation remains high and above the Fed’s 2% goal. This indicates that the central bank may still consider further rate hikes, despite signaling a possible pause. This has led to uncertainty among traders about whether the Fed will leave the door open for a hiking pause at the June meeting.

The market reacted negatively to the uncertainty, with the Dow Jones Industrial Average falling 0.8% to 33,414.24, the S&P 500 losing 0.70% to 4,090.75, and the Nasdaq Composite dropping 0.46% to 12,025.33.

The Dollar fell due to the possibility of a rate hiking pause, with the Dollar Index losing 0.461%. The EUR/USD gained 0.49% to 1.1053, USD/JPY lost 1.00% to 135.20, and GBP/USD was last trading at 1.2555, up 0.73% on the day.

US Treasury yields also fell, with benchmark 10-year notes down 7.3 basis points to 3.366% and the 30-year bond down 4.8 basis points to yield 3.6838%. The 2-year note yield was down 10.5 basis points to yield 3.8748%. This was due to the prospect that the Fed’s signal may pause in its tightening cycle at the next few meetings.

In energy, US crude settled down 4.27% at $68.60 per barrel, and Brent ended at $72.33, down 3.97%. Oil futures initially pared losses after the news but still settled down sharply after already falling 5% on Tuesday.

In precious metals, spot gold added 0.8% to $2,031.55/oz, having registered an all-time high at $2,081.46 in Asia before easing back to $2,075.00. The June COMEX gold futures gained 1.37% to settle at $2,064.60/oz, up $27.60/oz, having surged to just under the all-time high of $2,089.20/oz. This was the highest on record on a close-on-close basis.

In cryptocurrencies, digital assets struggled for direction ahead of the Federal Open Market Committee (FOMC) interest rate decision, with most cryptocurrencies trading lower. Bitcoin lost 0.37% to $28,511, while Ethereum (ETH) gained 0.21% to close at $1,874.00. Dogecoin (DOGE) lost 0.57% to settle at $0.078. Binance Coin (BNB) and Ripple (XRP) were down 0.6% and 1.9%, respectively, with Cardano (ADA) also down 2.6%, while Polygon (MATIC-USD) was up 2.1%.

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