US Stocks Fall After Fed Hold and War Continues – Dow down 2%
US equity markets came under heavy selling pressure overnight after the Federal Reserve left interest rates unchanged, with investors responding cautiously to the central bank’s outlook for inflation and monetary policy. The Dow Jones led the declines, falling 2.19% to 51,594, while the S&P 500 lost 1.52% to close at 7,316, and the Nasdaq dropped 1.74% to finish at 24,442 as traders reduced risk exposure following the Fed announcement.
The bond market delivered a mixed performance, with the two-year Treasury yield easing 1.4 basis points to 4.273%, reflecting softer expectations for near-term policy tightening, while the 10-year Treasury yield climbed 7.1 basis points to 4.677% as longer-term inflation and fiscal concerns continued to weigh on sentiment. The US dollar also weakened following the decision, with the US Dollar Index falling 0.59% to 100.82 against the major currencies.
Geopolitical tensions returned to the forefront after reports that the US and Saudi Arabia launched airstrikes against Iranian-backed groups in Iraq, reigniting concerns over stability in the Middle East. The renewed escalation sparked a sharp rally in energy markets, with Brent crude surging 7.68% to US$90.55 a barrel and WTI climbing 6.74% to US$84.46. Gold also benefited from the flight to safety and the weaker dollar, rising 0.94% to close at US$4,064.98 an ounce.
Dollar Drops After Fed – How Far Will It Go
The dollar took a big hit in trading yesterday after the Fed kept rates on hold in the 3.50%–3.75% range, with the DXY falling 0.6%. There had been a chance that the FOMC would have hiked rates by 25 basis points, as inflation is still sitting well above the committee’s desired level, and the market is now pricing in a 60% chance of a hike at the next meeting in September. FX traders are now assessing how much further the dollar could fall in coming sessions, with other updates in the market pointing to the potential for dollar strength to come back into play. Geopolitical factors will continue to have a strong effect on the greenback, and the recent escalation in the Middle East has led to more inflationary concerns, which should lead to a stronger dollar. Longer-dated US yields jumped significantly last night despite the Fed hold, and that may also attract some dollar bulls, so for some market players, last night’s drop may just be providing better levels to get into long positions.
Busy Day Ahead for Traders
Traders are anticipating a busy day ahead today, with the market expecting more reaction to last night’s Fed update, increased hostility in the Gulf, and an event-packed calendar. There is little of note scheduled in the Asian trading session; however, things heat up on the London open. Markets will be closely watching Germany’s preliminary CPI (exp. +0.7%) and GDP figures (exp. +0.1%) early in the session before focus turns to the Bank of England’s interest rate decision and press conference, with the bank firmly expected to keep rates at 3.75%. During the US session, traders will digest the latest Core PCE inflation data (exp. +0.2% m/m), Advance GDP (exp. +2.1% q/q), and Weekly Unemployment Claims (exp. 201k), with all three releases likely to play a significant role in shaping expectations for the Federal Reserve’s next move. Combined with any further geopolitical developments, another volatile session across financial markets appears likely.
