Important calendar events
The dollar steadied last week after markets had the time to digest the latest Fed rate hike, with the dollar index hovering just above the 106 value. US Bond yields also firmed last week, with the US 10-year treasury note yielding above 2.7%.
In its latest policy meeting, the US Federal Reserve raised its interest rate by 75-base points in an attempt to rein in inflation. Even though a 75-bp rate hike is substantial, bringing the Fed’s benchmark interest rate to 2.50%, markets were pricing in an ultra-high rate hike of 75 to 100 bps for July. The dollar retreated as the Fed’s monetary policy seems to move towards a less hawkish direction, disappointing market expectations.
Contracting economic activity, declining consumer confidence, and high inflation rates over the past month paint a grim picture of the economic outlook in the US, pushing the dollar down. The dollar rallied however last week, as stronger than expected economic activity and employment data towards the end of the week helped quell recession fears.
The Fed seems to be gradually moderating its stance, as it is tasked with battling soaring inflation without the benefit of a strong economic background. A robust economic outlook is required to enable the Fed to tighten its monetary policy further. Economic data, however, indicate that the US economy is still fragile and may not be able to withstand aggressive tightening.
Market participants are becoming more moderate in their expectations of a Fed interest raise in September. Although markets were originally pricing in another 75-bp rate hike, many traders now consider that a Fed pivot towards a more dovish policy might be likely, boosting bets of a 50-bp rate hike.
This month’s economic and inflation indicators are expected to play an important part in determining the Fed’s policy. This week, several important data are scheduled to be released and are eagerly awaited by traders. Key among those is the CPI inflation data due on the 10th and the PPI inflation data on the 11th. This week’s inflation figures will likely play a decisive role in September’s rate hike. Inflation in July is expected to come down from June’s highs, especially since fuel costs have been declining since late June. It remains to be seen, however, if the drop in inflation will be sufficient to moderate rate hike expectations. Also of importance this week are consumer sentiment data scheduled to be released on the 12th, which can indicate US economic activity.
The Euro weakened compared to the dollar last week, with the EUR/USD rate ending the week near the 1.017 level. If the currency pair goes up, it may encounter resistance at 1.027 and further up at 1.050. If the EUR/USD withdraws, it may find support at the parity level of 1.000, and further down near the 20-year low of 0.985.
The EUR/USD pair may start flirting with the parity level again this week, depending mainly on German and US inflation data. Struggling Eurozone economies, rampant inflation, and a looming energy crisis in the EU create a toxic combination, pushing the Euro down.
The ECB seems to be finally pivoting towards a more hawkish direction, aiming to rein in Eurozone inflation. The ECB’s decision to raise interest rates by 50 base points in its latest policy meeting was widely seen as ‘too little too late by market participants though and failed to provide long-term support for the Euro. This was the ECB’s first interest rate rise since 2011, bringing its benchmark interest rate from -0.50% to 0%. The Fed, on the other hand, raised its interest rate to 2.50% in July, emphasizing the gap between ECB and Fed policies and putting pressure on the Euro.
Currently, market participants are setting their sights on the September ECB policy meeting, with odds in favor of another 50-bp rate hike. Eurozone inflation data are expected to figure largely in determining the increase in ECB interest rate, with this week’s German inflation data eagerly awaited by traders.
The ECB’s new anti-fragmentation tool may be put to the test soon, as political instability in Italy has lowered the country’s rating outlook. This tool will be a new bond-purchasing program, designed to balance out economic differences caused by the wide range of lending rates across Eurozone states.
Several economic activity indicators are scheduled to be released this week for the Eurozone. Key among those is the German inflation data scheduled to be released on the 10th. Of rather less importance are France’s inflation data due on the 12th. EU inflation in July is expected to drop compared to June’s data, but not sufficiently to warrant a pause in the ECB’s monetary tightening. This week’s inflation indicators are expected to have a significant impact on the Euro as they may influence the ECB’s future direction.
The Sterling retreated against the dollar last week, with the GBP/USD rate closing around 1.207 on Friday. If the GBP/USD rate goes up, it may encounter resistance near the 1.219 level, while if it declines, support may be found near 1.140. The Sterling had benefitted from the dollar’s recent retreat but retreated again after the BOE’s policy meeting.
In its monetary policy meeting last week, the Bank of England decided to raise its interest rate by 50 base points, increasing the total interest rate to 1.75%. The BOE’s rate hike vote was unanimous, showing that all its members are in favor of a steady but conservative increase in interest rates in the face of rising inflation rates.
Markets had been pricing in a 50-bp rate hike for some time, however, and the Sterling weakened after the announcement of the interest rate. This week, the pound is expected to regain its equilibrium, after markets will have had time to absorb the latest BOE news.
UK inflation in June hit a 40-year high of 9.4%, forcing the BOE to tighten its monetary policy further. The BOE has adopted a moderate stance, trying to strike a balance between battling inflation and supporting the sluggish economy. The Fed, on the other hand, is moving at a more hawkish pace, raising its interest rate by 75 bps last month and putting pressure on the Sterling.
Britain’s grim economic outlook is preventing a more hawkish fiscal policy and is hampering the BOE’s attempts to bring inflation down. Last week, the BOE warned that recession is expected to hit the UK in the fourth quarter of this year, as economic contraction continues. The recession is forecasted to last for five quarters, until the end of 2024, with GDP falling to 2.1%.
The BOE also raised expectations of peak inflation, which is expected to climb to 13.3% in October. Stagflation is a risk for the UK economy, as soaring inflation rates add more pressure to the BOE to continue increasing its interest rates.
Political instability after British PM Boris Johnson’s resignation is keeping the Sterling down. The Tory Leadership race continues, with candidates Foreign Secretary Liz Truss and Rishi Sunak in a battle whose outcome is expected to be close. Both candidates recently addressed the cost-of-living crisis in the UK, promising either support for households or tax cuts. Tax cuts may raise inflation even further, prompting more aggressive rate hikes.
Several minor indicators of economic activity are scheduled to be released for the UK this week. The most important economic indicators are scheduled to be released on the 12th and include the Monthly GDP and Preliminary quarterly GDP. This week’s GDP data are expected to confirm the BOE’s forecast of reduced economic growth and may drive the Sterling further down.
In addition, several BOE members are due to deliver speeches this week, which may affect the Sterling in the wake of the BOE’s monetary policy meeting last week. Developments on the political front are also expected to affect the pound this week.
The Yen weakened last week as the dollar rallied, with the USD/JPY pair climbing above the 135.5 level at the end of the week. If the USD/JPY declines, support might be found near the 134.2 level and further down at 131.7. If the pair climbs it may find resistance near 139.4 and further up at the 1998 high of 147.7.
In its latest policy meeting in July, the BOJ kept its main refinancing rate at -0.10%, maintaining its ultra-easy monetary policy. The BOJ also kept its 0.25% yield cap on 10-year Japanese government bonds. US 10-year bonds yield over a magnitude more than corresponding Japanese bonds, presenting a more lucrative option to investors.
Japan continues to pour money into the economy, while other countries are adopting a tighter fiscal policy. The Fed recently raised its interest rate by 75 bps and is expected to continue its hawkish policy, putting pressure on competing assets such as the Yen. Other major Central Banks, such as the ECB, the BOE, and the Bank of Canada are also tightening their monetary policy, to tackle soaring inflation rates. The difference in interest rates with other major Central Banks puts the Yen at a disadvantage, driving its price down.
Japan's inflation is also rising, exceeding the BOJ’s 2% target. Japan’s poor economic outlook, however, hinders the BOJ from pivoting towards a tighter fiscal policy, with recent economic indicators showing that the Japanese economy is contracting. A weak currency, low wages, and rising inflation are burdening Japanese households.
The recent drop in fuel prices, however, is providing some support for the Yen. Japan is a net energy importer and the reduction in energy costs is providing some relief for the economy.
Several minor economic indicators are scheduled to be released this week for Japan, but these are not expected to affect the Yen significantly. Key among those is the Annual PPI data, due on the 10th, which are leading indicators of consumer inflation. This week reduced activity from fundamentals is expected for the Yen, with the 11th being a Bank Holiday for Japan.
Gold prices have been climbing for the past couple of weeks, taking advantage of the dollar’s weakness. Gold had been moving close to a yearly low, but has rebounded, reaching $1,794 per ounce last week. If gold prices decline, support may be found at $1,675 per ounce, while resistance may be found at around 1,813 per ounce and higher up at $1,870 per ounce.
Gold prices rallied last week, propped up by the fall of competing assets, such as the dollar and US treasury yields. The dollar steadied last week but continued trading at low levels, with the dollar index hovering just above the 106 value. US Bond yields remained relatively low, with the US 10-year treasury note yielding above 2.7%. Real yields compete directly with gold, which is a non-interest-bearing asset, and their decline benefits gold prices.
Global recession fears have sparked a risk-aversion sentiment, boosting safe-haven assets. With the dollar weakened these past couple of weeks, investors have turned once more towards the safe-haven gold, bolstering its price.
The pivot of most major Central Banks however towards a more hawkish fiscal policy is putting pressure on the price of gold. An increasing number of major Central Banks, such as the Fed, the BOE, and the ECB are moving towards a tighter monetary policy to combat rising inflation rates. Assets yielding interest become a more appealing investment compared to gold as interest rates rise.
This week’s US CPI and PPI inflation data scheduled to be released on the 11th and the 12th respectively are likely to affect gold price and may halt gold’s rally. US inflation rates in July are expected to remain at high levels, which may prompt the Fed to take decisive action with another steep rate hike in September, putting pressure on the price of gold.
Oil prices eased last week, with WTI falling just below the $90 per barrel level support level on Friday. This week, WTI is expected to continue testing the $90 per barrel support. If the WTI price declines further, it may encounter support at $82 per barrel, while resistance can be found near the $100 per barrel level and higher up at $105 per barrel.
Heightened global recession fears have reduced the oil demand outlook, putting pressure on oil prices. Concerns that interest rate hikes could slow global economic growth reducing energy demand have pushed oil prices down. An increasing number of major Central Banks, such as the Fed, the BOE, and the ECB are moving towards a tighter fiscal policy. Stalling economic growth combined with fiscal tightening and soaring inflation gives rise to fears of recession, pushing oil prices down.
Recent reports of an impending deal between the US and Iran are also adding pressure to oil prices.
Uncertainty over China’s oil demand is also causing fluctuations in oil prices. China is the largest importer of crude oil and Covid lockdowns have dampened oil demand, pushing prices down. Recent reports have shown that oil imports in China increased in June, but remain lower than last year’s values.
Oil supplies remain tight, however, supporting oil prices. In its latest meeting, OPEC+ maintained its output policy, raising its output by approximately 648,000 barrels a day. Many OPEC members continue to underperform though, raising doubts on whether the organization can maintain its output goal.
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