Monetary policy to dominate commodity market sentiments in upcoming central bank-focused week

The market expectations for a pause at the FOMC policy meeting on September 19-20 remain largely unchanged

By Ravindra V Rao, CMT, VP-Head Commodity Research at Kotak Securities

Global markets experienced a boost as Chinese regulators intensified efforts to stimulate domestic consumption, while persistent US inflationary pressures limited gains elsewhere.

The US dollar surged to a six-month high, reaching 105.43, as stubborn inflation in the United States fuelled expectations of continued monetary tightening by the Federal Reserve.

In August, the US Consumer Price Index (CPI) rose by 0.6 percent marking the largest monthly increase since May 2022. Meanwhile, the core inflation rate moderated for the fifth consecutive month to 4.3 percent aligning with market expectations. Retail sales in August also exceeded expectations, rising by 0.6 percent, showcasing the resilience of consumers in the face of elevated prices. This leaves room for potential interest rate hikes in November or December, following an expected pause this month.

The US dollar received further support as the euro extended its decline for the ninth consecutive week. This decline followed hints that the European Central Bank (ECB) might temporarily halt further rate hikes, after raising rates by 25 basis points to a historic 4 percent.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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The ECB's statement indicated that the key interest rates have reached levels that, if maintained for a sufficient duration, will contribute significantly to the timely return of inflation to the target.

COMEX Gold recovered after falling to as low as $1,921.70 per troy ounce. The latest US data has raised concerns about another interest rate hike by the Federal Reserve. Nevertheless, the market expectations for a pause at the FOMC policy meeting on September 19-20 remain largely unchanged. In contrast, silver benefited from a rally in base metal prices and increased inflows in iShares holdings.

Regarding the price movement, the silver spot in dollar terms displayed a bullish engulfing pattern, while MCX silver exhibited a morning star candlestick formation near the 200 SMA support on the daily chart. These indicators suggest the potential for a silver price recovery in the upcoming week.

WTI Crude prices surged above $90 per barrel for the first time since November 2022. Major oil agencies like IEA, OPEC and EIA projected a modest to significant deficit in the oil market during the second half of the year. In our previous week's article, we noted the possibility of bullish momentum driving the price of NYMEX WTI to $90 per barrel. As anticipated, this scenario materialised with the price surpassing the $90 mark on a weekly closing basis. The ongoing trend appears to remain positive with the contingent upon the crucial level of $88 per barrel holding on a closing basis.

LME base metals experienced fluctuations during the week due to a sharp rebound in the dollar and renewed concerns in property markets. However, the People's Bank of China's decision to cut the reserve requirement ratio (RRR) for all banks, except those already implementing a 5 percent reserve ratio, by 25 basis points from September 15 along with surprisingly positive economic data from China provided some support to the metals sector.

In the upcoming week, the focus will be on the FOMC statement and economic projections. Recent US data releases revived expectations of a soft economic landing despite higher interest rates. The Bank of England (BOE) is likely to raise rates amid elevated inflation while the Bank of Japan's (BoJ) policy will be closely monitored after Governor Kazuo Ueda hinted at the possibility of ending negative interest rates earlier.

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