China stimulus hopes lift sentiment but caution lingers

The mood across Asian markets brightened on Tuesday as China’s pledge to shore up its weak economy lifted sentiment and boosted Chinese shares. 

European markets opened on a steady note, drawing support from Asia but investors remain cautious ahead of another week jampacked with risk events. US futures are currently flat, but Wall Street could see heightened volatility this week due to earnings from big tech titans including Microsoft, Alphabet, and Meta. In the currency space, the US dollar edged lower against other G10 currencies ahead of the pivotal Federal Reserve policy meeting on Wednesday. Elsewhere, gold is flirting around $1960 supported by a softer dollar, while oil is holding near a three-month high amid China stimulus optimism. 

Dollar outlook hinges on Fed meeting 

The Federal Reserve rate decision on Wednesday is likely to influence the dollar’s medium to longer-term outlook. Markets widely expect the central bank to raise interest rates by 25 basis points, taking the Fed funds range 5.25 to 5.5%. However, the question is whether this will be the hike that draws the curtains on the central bank's aggressive hiking campaign. Given the mixed US economic data over the past few weeks, all eyes will be on Fed Chair Jerome Powell’s press conference for clues on future monetary policy moves.

If Powell strikes a hawkish stance and signals more rate hikes down the line, this could boost the dollar. Alternatively, a cautious sounding Powell who hints that the Fed is done with hiking rates could send the dollar tumbling across the board. Traders are currently pricing in a 97% probability of a 25-basis point hike on Wednesday, with the chance of another 25-basis point hike by November’s meeting currently around 38%, according to Fed funds futures. 

The dollar has recently been in corrective mode after a rough month in which it has depreciated against every single G10 currency. Looking at the charts, the US dollar Index has pushed back above the 100.70 level, taking prices back within the previous range. The events of this week will most likely dictate whether prices can keep above 100.70 or sink back below 100.

Commodity Spotlight – Gold 

This could be an explosively volatile week for gold due to the Federal Reserve rate decision and incoming key US economic data. Bulls are already lurking in the vicinity, with prices pressing above the sticky $1960 as of writing. Whatever the outcome of the Fed decision, it is likely to rock zero-yielding gold on Wednesday.

It will also be wise to keep a close eye on the key US Q2 GDP, initial jobless claims, durable goods and June PCE data in the second half of the week. When factoring in how these key releases may impact Fed hike expectations beyond July’s policy meeting, this could translate to heightened volatility for gold. 

A solid breakout above $1970 could trigger a push towards $1985 and $2000, respectively. Should prices slip back below the 50-day Simple Moving Average around $1947, bears may target $1940 and $1932. 

Stocks China stimulus Oil Gold Dollar G10 FED Earnings Big Tech