The Fed turns dovish as scheduled, non-farm payrolls may stir up waves again

Within just 12 hours, the interest rate decisions of the Bank of Japan and the Federal Reserve jointly injected confidence into the market.

Prior to this, the pullback of US technology stocks over the past two weeks and the unwinding of the US/Japan arbitrage trade both shared a common logic, which was the strong market expectation for the Bank of Japan to raise interest rates. After the shoe dropped, investors' enthusiasm for technology stocks seems to have been reignited, of course, the dovish statement from the Federal Reserve and optimistic financial reports from companies like AMD also played a role in boosting the market sentiment.

The Federal Reserve maintained interest rates unchanged early this morning, but acknowledged the decline in inflation and the slowdown in the job market, giving the green light for a rate cut in September. The interest rate market is betting on a total rate cut of close to 60 basis points for the year.

The three major US stock indexes collectively rose on Wednesday, with the Nasdaq soaring by as much as 2.6%. Apart from Microsoft, all major tech stocks saw gains, with NVIDIA surging by 12%. The optimism continued in after-hours trading, with strong financial reports driving META's stock price up by 7% and NVIDIA continuing to rise by 3.7%.

The Bank of Japan's decision to shrink its balance sheet was expected, but the 15 basis point rate hike was slightly surprising. Furthermore, the Bank's Governor expressed an open attitude towards further rate hikes in the future, which helped the yen rebound strongly overnight (breaking below the 150 level against the US dollar). The US dollar index fell to around 104, helping gold jump to 2447, just 1.5% away from its historical high.

WTI crude oil surged by 4.4% on Wednesday, returning above $78, driven by Middle East geopolitical risks and a weak US dollar, leading to a long-awaited rebound. US crude oil inventories decreased by 3.74 million barrels last week, exceeding expectations and marking the fifth consecutive weekly decline.

Non-Farm Payrolls Preview (Friday 20:30)

Tomorrow night's US July non-farm payrolls report may push the super week to another peak, as this could substantially change the probability of rate cuts in November and December, with the market focus so far being on September. Data released this week once again confirmed that the job market is slowing down.

• The number of job vacancies in the US in June decreased by 8.18 million, with the ratio of job vacancies to unemployed persons dropping to 1.2:1, the lowest level in 3 years.
• ADP data shows that the private sector added 122,000 jobs in July, well below previous figures and expectations, and declining for the fourth consecutive month. However, the correlation between ADP and non-farm payrolls is not high, so its reference value is not strong.
• Tonight, pay attention to the number of initial jobless claims for the previous week.

For this non-farm payrolls report, the market generally expects an addition of 175,000 jobs, with the previous figure at 206,000, and the unemployment rate expected to remain at 4.1%, while hourly wage growth is expected to drop from 3.9% to 3.7%. Besides the latest published values, whether the previous figures will be revised down again is also a focus of attention.

Better-than-expected employment data (such as a drop in the unemployment rate below 4%) is expected to suppress the just-recovered rate cut expectations, thereby helping the US dollar to stop falling. Conversely, if employment data performs poorly or falls short of expectations, it will stimulate bets on rate cuts in November and December, combined with dovish statements from the Federal Reserve, which will be positive for trends in gold, US stocks, and other assets The following are the past 12 non-farm data and the market performance on the day, for reference only.

XAUUSD Daily Chart

After two weeks of retracement, the price of gold once again broke through the upper boundary of the 4-7 month range this week. With the expectation of interest rate cuts driving the US dollar lower, the next target for the bulls is naturally the historical high of 2483. However, the long-term outlook for gold during an interest rate cut cycle is even more promising.

While tonight's initial jobless claims and manufacturing PMI are important, tomorrow night's non-farm payrolls will be the absolute focus, as its uncertainty far exceeds the just released Fed interest rate decision. Therefore, the overnight and one-week implied volatility for gold reached an astonishing 30.8% and 19.5%, respectively.

If the non-farm payrolls perform better than expected overall, or if the pace of increase slows down, the initial support near 2430 will be a downside focus.

However, if a bullish engulfing pattern can be formed on the weekly closing chart this week, it implies that the price of gold may maintain upward momentum in the short term.

WTI Crude Oil Daily Chart

Oil prices rebounded near the key trend line on Wednesday, recovering the declines of the previous 5 trading days and returning above the 200-day moving average. The market's optimism seems to have returned, and the technical pattern has basically confirmed a temporary bottom at 74.50.

However, in addition to being tested by key moving averages and Fibonacci retracement levels (in the $78-79 range), the non-farm data may have a different impact. Although the direct correlation between non-farm payrolls and WTI crude oil is not high, oil prices have fallen on the day of the past 6 non-farm announcements! This may also suggest that the road to recovery for oil prices will not be smooth sailing.

Breaking above the aforementioned resistance may challenge the $82 level where the downtrend line is located.

USDJPY Daily Chart

On one hand, the Fed has given the green light for interest rate cuts, while on the other hand, the Bank of Japan's "rate hike + balance sheet reduction + intervention" hawkish combination has narrowed the interest rate policy difference between the US and Japan to around 3%, the lowest level since May 2023 The interest rate differential is still significant, and arbitrage trading may make a comeback. Therefore, it is not ruled out that the exchange rate may stop falling near the trend line of 148.30 and correct the oversold technical indicators. However, the direction with the least resistance for the exchange rate is still downward, with a moderate rebound potentially becoming an opportunity for short positions. If the key trend line is broken, there is a risk of falling to the December low of 140.

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