1. Federal Reserve's Rate Hike Decision and Market Expectations [1]

thumbnail The Federal Reserve (the Fed) was expected to raise interest rates for the first time since 2023, with markets anticipating a hawkish stance to combat rising inflation.

1.1. Pre-Decision Market Sentiment and Technical Analysis [1]

  1. The market was in a state of uncertainty regarding the Fed's upcoming interest rate decision, which was expected to be a significant event. [1]
    1. The decision was anticipated to be the first rate hike since 2023. [2]
    2. There were only 20 minutes remaining until the dot plot, statement, and Fed Chair Kevin Worsh's press conference. [4]
  2. The DXY (Dollar Index) showed mixed signals, making it difficult to predict a clear market bias. [13]
    1. The DXY had experienced choppy price action since August 19, forming a 5-3-3 reversal pattern within a channel. [16]
    2. Key levels included a channel top at 9,960 and a support level at 9,900. [19]
    3. The DXY was currently in a mid-range confluence zone, an area with significant past price action, suggesting that the best strategy might be to avoid trading. [22]
    4. The preferred stance was to buy into dips in the dollar, which would correspond to selling into rallies for gold and the Eurodollar. [32]
  3. Traders were advised to diversify beyond the US dollar and consider other currencies like the New Zealand dollar and Sterling, given upcoming economic events for these currencies. [36]

1.2. Federal Reserve's Expected Actions and Economic Context [41]

  1. An 88% chance of a rate hike was expected from the Federal Reserve, though this was lower than the typical 97-99% certainty seen in previous decisions. [45]
  2. The dot plot, which contains the Fed's quarterly projections for growth, inflation, employment, and interest rates, was a key focus. [50]
    1. In June, expectations were low, with discussions even including interest rate cuts. [54]
    2. Since then, conditions had changed significantly, with rising oil prices, higher bond yields, and a strong US economy. [56]
    3. The US economy showed robust job growth (162,000 new jobs) and an annualized growth rate of 5.1% for the third quarter, according to the Atlanta Fed. [59]
    4. Fed Chair Powell had also signaled a rate hike at Jackson Hole, providing further justification. [64]
  3. Bond markets anticipated a moderate tightening cycle, with one rate hike now, another in December, and a third in March. [66]
  4. Powell faced a dilemma between combating rising inflation to maintain credibility and political pressure from former President Trump, who favored lower interest rates. [68]
  5. Worsh, the Fed Chair, preferred not to use forward guidance (telling markets what to expect next) but might be compelled to provide some to calm turbulent bond markets, which feared the Fed losing control over inflation. [71]

1.3. Long-Term Dollar Index Outlook and Trading Strategy [79]

  1. A long-term daily chart of the DXY suggested two possible scenarios: an upside rally followed by a sell-off, or a continued rebound. [83]
    1. The market was expected to experience turbulence following the rate decision. [96]
    2. A preferred scenario involved a dip in the dollar index, leading to a rally in gold and the Euro against the US dollar, which would then create selling opportunities. [97]
  2. Traders were advised against reacting immediately to the expected rate decision, as the initial market reaction is often not the correct one. [102]
    1. The press conference was expected to be more influential than the initial announcement. [105]
    2. The market was in a mid-range position without a clear bias, reinforcing the strategy of buying into dollar dips and selling into rallies for gold and the Eurodollar. [106]

2. Market Reactions and Fed's Balancing Act [109]

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The Fed's decision to raise rates and signal future hikes aimed to control inflation without stifling economic growth, leading to immediate market reactions in the dollar, gold, and other currencies.

2.1. Gold Market Dynamics and Fed's Dilemma [109]

  1. The initial market reaction to Fed decisions is often misleading, with reversals occurring before the press conference. [110]
    1. The rate decision and dot plot were scheduled for 10 minutes, followed by the press conference 30 minutes later. [112]
  2. The Fed needed to balance raising interest rates to control inflation without harming economic growth, stocks, and gold. [123]
    1. If the dot plot indicated three hikes, it might be seen as too hawkish, but only 25 basis points would be insufficient for markets seeking more aggressive inflation control. [116]
    2. Markets, unusually, desired more rate hikes to control inflation, even though stocks and gold typically prefer lower rates. [120]
  3. Gold's price action was analyzed using an 8-hour chart, indicating a completed five-wave pattern and a current corrective Wave 2 formation to the downside. [128]
    1. Cipher pattern analysis and AB=CD corrective formations suggested further downside movement for gold, towards liquidity levels around $4,078 and a bullish Bat pattern at $4,030. [137]
    2. Historical support and resistance levels, particularly at 4,376, indicated potential for a move up before a downside reversal. [150]
    3. The preferred strategy for gold traders was to sell into rallies, aligning with a dollar bias of buying into dips. [160]
  4. Gold competes with yields as a safe haven; higher US Treasury yields (above 5% for 10-year and 5.37% for 30-year) made yieldless gold less attractive, causing its decline. [167]
    1. A very hawkish Fed, convincing markets it would kill inflation, could send long-term yields down, benefiting gold. [175]

2.2. Euro-Dollar and Initial Market Reactions [178]

  1. The Euro-Dollar showed a medium-term bearish bias, consistent with selling into gold rallies and buying into dollar dips. [179]
    1. Technical analysis identified a crab formation at 114.21 and a point of control at 114.17, both high-liquidity zones. [182]
    2. Inside candles indicated market consolidation before the rate decision, as traders awaited the announcement. [185]
    3. A resistance level at 11,590 suggested a potential upside breakout to sweep stop losses before moving lower. [189]
    4. The preferred strategy was to sell into gains for a medium-term move to the downside, aligning with the overall dollar strength. [193]
  2. The Fed raised interest rates by 25 basis points, the first hike since 2023, and upgraded the dot plot for the current year. [215]
    1. The immediate reaction in the dollar index was bullish but with limited movement, consolidating at pre-announcement levels. [217]
    2. The dot plot indicated a half-percent upgrade for 2026 but lower rates for 2027, suggesting a mixed, not overly hawkish, message. [225]
  3. The Fed's statement revealed a unanimous vote (12 out of 12 FOMC members) in favor of the rate hike, signaling unity and certainty to markets. [250]
    1. The Fed acknowledged an expanding economy but also discussed uncertainty, geopolitical developments, and strong productivity growth (potentially linked to AI). [256]
    2. The Fed's focus remained on inflation, while job gains, its second mandate, also remained strong. [260]

3. Fed Chair's Press Conference and Market Outlook [263]

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Fed Chair Worsh's press conference reinforced a hawkish stance, emphasizing the Fed's independence and commitment to fighting inflation, while also touching on geopolitical factors and their impact on energy prices.

3.1. Currency Market Updates and Fed's Dot Plot Details [263]

  1. The US dollar against the Japanese yen showed consolidation around 155.50, with chart patterns suggesting a move to the downside before a rebound. [263]
    1. Traders were advised to be cautious about opening new positions immediately after the figures and to wait for the press conference. [271]
  2. The dot plot indicated an upgrade to 4.1% for 2026, implying one more rate hike in December, which aligned with market expectations and provided calm. [276]
    1. This meant no rate hike was expected in October. [279]
    2. The dot plot for 2027 showed no change, suggesting stability, possibly a hike in March followed by a cut later. [282]
  3. Silver, heavily correlated with the US dollar and gold, also showed a similar scenario on an 8-hour chart, with a move to the upside followed by messy, corrective price action to the downside. [291]
    1. Three-wave patterns in silver highlighted corrective structures, indicating that while the move lower was corrective, it might not have ended. [297]
    2. Resistance zones, including bespoke resistance at $6,512 and a point of control at $6,555, suggested selling into rallies. [305]
    3. The overall market reaction was limited, with the Fed successfully conveying a message of calm despite a sharp drop in gold for high-frequency traders. [320]
  4. Betting markets aligned with the dot plot, showing a 31% chance of an October rate hike (67% unchanged) and a 67% chance of a December hike, reinforcing the Fed's message of stability. [333]

3.2. Gold and Other Currency Pair Outlooks [339]

  1. The initial market reaction to the Fed decision is often a "knee-jerk" reaction, followed by another reaction during the press conference. [349]
    1. A 1-hour gold chart showed a corrective channel formation, with a potential push towards the 4,376 resistance barrier during the press conference. [351]
    2. The medium-term outlook for gold, if a bullish Bat formation completed, would project it to the upside after an initial dip. [361]
  2. The New Zealand dollar was a focus due to upcoming GDP figures, with a long position favored against the Japanese yen and a bullish outlook against the Canadian dollar and Australian dollar. [375]
    1. The New Zealand dollar yen showed a five-wave move to the downside, with pivot levels and a point of control suggesting a swing to the upside. [382]
    2. The New Zealand CAD had a wedge formation with a point of control and a wedge target at 8210, offering a good risk-reward factor. [395]
    3. The Aussie New Zealand showed a bullish Elliott Wave formation, with five waves up and corrective structures to the downside, indicating long opportunities. [400]
  3. The 30-year yield decreased, which was positive for US mortgage holders, indicating the Fed's success in calming some markets. [409]
    1. However, 10-year yields were slightly higher, and overall market movement was limited, with markets awaiting the press conference. [413]
    2. The US dollar was higher, and gold was lower, reflecting the Fed's hawkish message and signaling another rate hike this year, but no additional hikes in 2024. [419]

3.3. Geopolitical Factors and Stock Market Analysis [419]

  1. The dollar index hit a key level at 99.70, approaching the channel top, suggesting a potential swing high before a reversal. [423]
    1. The US 10-year yields and the dollar had been out of sync, with yields rising and the dollar moving lower. [429]
    2. A reaction around 5% for 10-year yields and a potential lower reaction in the DXY could question further downward movement in gold. [433]
  2. The rise in energy prices, driven by geopolitical events in the Middle East, was a primary reason for the Fed's hawkish stance. [447]
    1. Disruptions to Saudi Arabian oil pipelines and waterways (Strait of Hormuz, Bab el-Mandeb strait) reduced global oil supply. [451]
    2. Rising demand from China and depleted strategic petroleum reserves further exacerbated the situation. [458]
    3. High diesel prices (above $6 a gallon) indicated that energy price increases could spread to other goods, fueling inflation concerns. [460]
  3. The Russell 2000 showed a "wonky little head and shoulders formation" and a five-wave move to the downside, with a 261.8% extension level at 2,848. [471]
    1. Higher rates typically lead to lower stocks, so the immediate bias was to the downside. [479]
    2. However, an ending wedge pattern and a measured move target at 2,976 (aligning with a six-month point of control) suggested that dips would be bought, leading to an upside price action. [480]
  4. The S&P 500 was in a corrective channel formation with overlapping price action, indicating corrective rather than impulsive waves. [497]
    1. An initial rally was sold into, but a strong yearly point of control at 7,573 suggested a potential flag pattern. [505]
    2. This aligned with the Russell 2000's suggestion to buy into dips, with a potential sweep of liquidity and a break higher. [509]
    3. These corrective channel formations are difficult to trade intraday but have a bias to break to the upside. [511]

4. Fed Chair Worsh's Press Conference and Policy Stance [516]

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Fed Chair Worsh delivered a hawkish message, emphasizing the Fed's commitment to price stability, independence from political pressure, and the strength of the US economy, while downplaying the influence of individual data points.

4.1. Worsh's Opening Remarks and Economic Assessment [516]

  1. Fed Chair Kevin Worsh began his press conference by announcing the FOMC's unanimous decision to raise the federal funds rate by a quarter of a percentage point to 3.75% to 4%. [533]
    1. This action supported the Fed's dual mandate of maximum employment and price stability. [535]
    2. The economy was expanding at a solid pace, with resilient domestic spending, strong productivity growth, and robust capital investment. [536]
    3. Job gains kept pace with the workforce, and the unemployment rate remained low, indicating a healthy labor market. [538]
  2. Worsh emphasized that inflation remained elevated and was the Fed's predominant focus. [539]
    1. Inflation had been above target for over five years, with recent readings not showing meaningful improvement. [559]
    2. Total PCE prices were around 3.6% to 6% in August, with core PCE and CPI at 3.2% and 2.3%, respectively. [564]
    3. Many categories still showed increases above 3% on both six- and 12-month bases, and commodity prices also bore watching. [566]
  3. The committee's unanimous vote demonstrated its resolve to achieve price stability more quickly. [577]
    1. The goal was to ensure consistent credit and financial conditions, prevent relative price changes from broadening, keep inflation compensation in market prices low, and maintain well-anchored inflation expectations. [579]
  4. The Summary of Economic Projections (SEP) reflected the committee's views, with real GDP rising at 2.3% this year and 2.4% next year. [580]
    1. Total PCE inflation was projected at 3.7% this year, falling to 2.3% next year. [585]
    2. The median participant judged the appropriate federal funds rate to be 4.1% at year-end and to remain there next year. [587]
    3. Inflation risks were to the upside, while labor risks were balanced. [588]
  5. Worsh noted that most advanced economies faced similar price pressures, with central banks making independent judgments. [589]
    1. The Fed's decision reflected its best judgment in serving its mandate and sustaining economic progress. [591]

4.2. Worsh's Responses to Press Questions [598]

  1. Worsh stated that the Fed cannot affect individual prices like oil or food but can prevent relative price changes from broadening. [605]
    1. He avoided prejudging future decisions, emphasizing commitment to principles and observing reality rather than adhering to typical patterns. [614]
  2. When asked if the rate hike was market-led, Worsh asserted the Fed's independence, stating, "Today was our decision." [625]
    1. He acknowledged observing market prices but stressed that the Fed's decisions are based on its assessment of the economy and employment trajectory. [635]
  3. Worsh addressed President Trump's calls for rate cuts by stating he had "nothing for you on a discussion with the President." [644]
    1. He reiterated that the decision was made to fulfill Congress's mandate for stable prices, benefiting the "least well-off" who gain most from stable prices and a strong economy. [647]
  4. Worsh highlighted three factors influencing the unanimous decision: the strengthening economy, persistent inflation trends, and changes in geopolitical situations. [665]
    1. He noted that data, including labor markets, indicated a stronger economy than previously judged. [666]
    2. Inflation trends had not meaningfully improved, remaining in the "inflationary zone." [670]
  5. Worsh found it difficult to describe current financial conditions as restrictive, implying that more hikes might be possible. [681]
    1. He dismissed the concept of a "neutral rate" as an academic matter with no operational effect on current decisions. [697]
  6. Worsh downplayed the focus on individual data points like the August CPI, stating, "Data point dependence is a dangerous preoccupation." [707]
    1. He emphasized that "trends matter" and markets would eventually understand the Fed's decision-making process. [714]
  7. Worsh reaffirmed the Fed's independence from political pressure, stating, "We stay in our lane." [732]
    1. He explained that the "least well-off" are those without financial assets or home equity, who benefit from stable prices and real wage increases. [743]
    2. He concluded that "inflation is a choice, and today we took a step in delivering it." [754]
  8. Worsh noted that foreign central banks also faced high inflation pressures and were making similar policy decisions, leading to global spillovers and spillbacks. [762]
    1. He explained that his assessment of the US economy had changed, with data broadly indicating a stronger economy and persistent inflation as the main problem. [776]

5. Post-Conference Market Analysis and Future Outlook [786]

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Following the press conference, the market saw a strengthening US dollar and weakening gold, with analysts predicting continued trends and highlighting upcoming economic events.

5.1. Immediate Market Reactions and Technical Outlook [786]

  1. The hawkish message from Fed Chair Worsh sent the US dollar up, gold down, and stocks down. [786]
    1. Despite some initial technical profit-taking, the dollar showed fresh strength, and gold experienced fresh losses. [790]
    2. Worsh's refusal to provide forward guidance, despite signaling another rate hike this year, reinforced the Fed's determined stance. [791]
  2. The dollar index showed an aggressive breakout to the upside, approaching cycle resistance at 99.93 and the 100 big figure. [803]
    1. This suggested the completion of a fifth wave and a continued move to the upside for the dollar. [807]
    2. Gold, in contrast, looked bearish, with a move up to 4,399 followed by a decline, indicating a bias to break to the downside towards 4,199 and 4,100. [809]
    3. The Euro was moving aggressively towards its crab formation target at 11,421 and point of control at 11,417. [818]
  3. The US 2000 was nearing its target level or 261.8% extension at 2,848, indicating an aggressive move to the downside. [837]
    1. Liquidity below the trend of lower lows suggested potential for a spike down and then a correction higher. [839]
    2. The medium-term outlook for gold remained lower, despite an expected short-term bounce that did not reach the anticipated resistance level. [841]
  4. US 2-year yields leaped alongside the US dollar, indicating market expectations for more rate hikes. [850]
    1. US 10-year yields also rose, potentially worrying the Fed if they broke above previous highs around 5.04%. [854]
    2. 30-year yields, important for mortgages, remained contained within a range, contrasting with other charts that were out of range. [858]

5.2. Upcoming Events and Concluding Remarks [865]

  1. The Bank of England was expected to announce its decision the following day, with rates anticipated to remain unchanged. [870]
    1. A dip in Sterling (around 1.2076) was seen as a buying opportunity, with a yearly point of control at 1.2133. [873]
    2. Sterling against the Australian dollar showed a bullish big picture, with a five-wave move up and a corrective structure to the downside, suggesting dip buying opportunities around 18,780-18,752. [878]
  2. The Fed's decision was characterized as relatively hawkish, driven by the need to fight inflation, maintain independence, and address geopolitical impacts on energy prices. [888]
    1. The dot plot for 2027 showed rates remaining unchanged, which was not extremely hawkish, but Worsh's message emphasized the Fed's commitment to price stability over five and a half years. [890]
    2. The upbeat economic message, strong job market, and focus on protecting those without financial assets also contributed to the hawkish stance. [930]
    3. No rate hike was expected in October, but the overall message was hawkish, with expectations for continued US dollar strengthening and gold weakening. [935]
  3. The US Dollar Index was at a pivot level of 100, with a high chance of breaking higher, leading to consolidation or sideways price action. [939]
    1. Gold was expected to decline further, with a bias to break to the downside towards 4,100. [945]
  4. Upcoming events included the New Zealand dollar GDP figures overnight and the Non-Farm Payrolls in early October. [949]