On June 8, confronted with a labor market far surpassing expectations and highly resilient economic data, Goldman Sachs officially capitulated to the reality of "higher for longer." In its latest research report, David Mericle, the bank's chief US economist, completely abandoned expectations for rate cuts this year and significantly postponed the final two cuts in its model to June and December 2027.
The report sent a clear signal: driven by a triple catalyst of taxes, war-induced high oil prices, and AI demand, core PCE inflation will stubbornly remain above 3% in 2026, leaving the Federal Reserve with no sense of urgency to cut rates in the near term.
Not only that, but Goldman Sachs also doubled the probability of a Fed rate hike to 20%. This means the market must recalibrate its bets on the easing path, with funds positioned for near-term rate cuts facing a severe test. Although Goldman still expects GDP growth in the second half of the year to be slightly below potential due to high oil prices dragging on spending, this is not enough to alter the Fed's determination to hold steady.
Furthermore, among major Wall Street investment banks, nearly all have abandoned forecasts for a 2026 rate cut, with some even pivoting to predict hikes. Citigroup remains an outlier, sticking to its call for three rate cuts this year. Andrew Hollenhorst, Citigroup's chief US economist, stated last Friday that the strong jobs report would lead Fed officials to "hawkishly focus on inflation upside risks, rather than employment downside risks" at the June 16-17 meeting. However, he expects the labor market to soften over the next three months, at which point the market will "re-price rate cut probabilities, not hike probabilities." Citigroup maintains its forecast for the Fed to cut rates by 25 basis points each in September, October, and December.
This outlook stands in stark contrast to the current market trajectory. The bond market has been hit hard, with the 2-year Treasury yield surging 15 basis points last week. The interest rate swap market now fully prices in a Fed rate hike by December, with about a 60% probability of a hike in October.
Data to watch today includes the Eurozone Sentix Investor Confidence Index for June, Canada's Leading Indicator month-on-month for May, and the US New York Fed's 1-Year Inflation Expectations for May.
Gold/US Dollar
Gold sold off sharply last Friday, hitting a fresh 10-week low, with the spot price currently trading around $2,285. The primary pressure came from a much stronger-than-expected US non-farm payrolls report, which revived expectations for Federal Reserve interest rate hikes. The data showed the addition of 172,000 jobs in May, far exceeding the forecast of 85,000. Additionally, rising US Treasury yields also exerted some downward pressure on the precious metal. Resistance is anticipated near $2,350 today, with support around $2,200.
US Dollar/Japanese Yen
The USD/JPY pair moved higher last Friday, breaking through the 160.00 level and reaching a fresh 5-week high, with the current price trading around 160.30. The main driver was the continued ascent of the US Dollar Index, buoyed by the strong non-farm payrolls report boosting Fed hike expectations and safe-haven demand. However, concerns about renewed Japanese intervention in the currency market and expectations for a Bank of Japan rate hike limited the pair's upside. Resistance is seen near 161.00 today, with support around 159.50.
US Dollar/Canadian Dollar
The USD/CAD pair advanced last Friday, reaching a new 9-week high, with the current price trading around 1.3940. The key driver was the US Dollar Index breaking above the 100.00 level, fueled by the strong non-farm payrolls report reigniting Fed rate hike expectations. Additionally, a decline in crude oil prices provided some support for the pair. However, robust Canadian employment data released during the session capped the pair's gains. Resistance is anticipated near 1.4050 today, with support around 1.3850.
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