Important calendar events
The dollar gained strength last week, boosted by upbeat US economic data and increased rate hike expectations. The dollar index rose to the 105 level for the first time since March and closed above this level on Friday. US Treasury yields remained firm, with the US 10-year bond yielding 4.27%.
Robust US economic activity data boosted the dollar last week. Strong economic data last week showed that the US economy is resilient, increasing the odds of future rate hikes.
US Unemployment Claims dropped to 216K from 229K, against expectations of a 232K print. Unit Labor costs rose by 2.2% in the second quarter of the year, beating estimates of 1.8% raise. The price businesses pay for labor is an overall indication of inflation and economic activity. Nonfarm Productivity increased by 3.5% in Q2 of 2023 in line with expectations. US ISM services PMI data, increasing odds of another rate hike in September. ISM Services PMI rose to 54.5 in August from 52.7 in July, versus 52.5 forecast.
The dollar is expected to be driven in the next few weeks by Fed rate hike expectations. The U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years.
Federal Reserve Chair Jerome Powell, recently speaking at the Jackson Hole Symposium in the US, warned that the Fed is prepared to raise interest rates further to bring inflation down. The Fed’s aggressively hawkish policy over the past year has been paying off and inflationary pressures in the US are easing.
Most investors are anticipating a pause in rate hikes, but the US central bank has signaled that further tightening is possible if inflation does not go down consistently. Markets are expecting a pause in rate hikes this month but market odds of another rate hike in November are increasing.
Headline inflation rose to 3.2% in July from 3.0% in June, versus the 3.3% forecast, indicating that inflationary pressures are not decreasing consistently. US monthly CPI and Core CPI, which excludes food and energy, both rose by 0.2% in July. PPI, and Core PPI, also increased more than expected in July, both rising by 0.3%, against estimates of a 0.2% growth.
Core PCE Price Index, which is the Fed’s preferred inflation gauge, fell within market expectations last week. Core PCE remained high, rising by 0.2% monthly in July, bringing the annual rate to 4.2%.
Preliminary GDP for the second quarter of 2023 showed that the US economy expanded by only 2.1% against expectations of 2.4% growth. The preliminary GDP price index for the 2nd quarter of the year also came in below expectations at 2.0% versus 2.2% anticipated.
US inflation data this coming week will likely affect the price of the dollar significantly. CPI data on the 13th and PPI data on the 14th will provide important information on US inflationary pressures. This week’s inflation data may play a decisive role in future Fed rate decisions.
EUR/USD dipped last week, dropping to the 1.070 level on Friday, as the dollar gained strength against rivaling currencies. If the EUR/USD pair declines, it may find support at 1.068, while resistance may be encountered near 1.094.
This week the attention of market participants will be focused on the ECB policy meeting on the 14th. The ECB raised interest rates by 25 bp at its July policy meeting, bringing its primary refinancing rate to 4.25%.
The ECB rate decision this week is expected to affect the price of the Euro considerably since market odds are currently split between a pause in rate hikes and a 25-bp rate hike. Most market analysts anticipate a complete pause in rate hikes, which will likely signal the end of rate hikes for the ECB. Deteriorating economic conditions in the Eurozone are likely to force the central bank to dial down its tightening policy.
ECB rhetoric was hawkish last week, boosting the Euro. ECB’s Peter Kazimir and Klaas Knot stressed that the central bank should raise rates further and that investors betting against an ECB rate hike would likely be in for a surprise. ECB President Christine Lagarde delivered a speech on Monday at an event hosted by the European Economics and Financial Centre, in London. Lagarde’s speech was non-committal on Monday, avoiding addressing the central bank’s rate decision next week.
Lagarde, speaking at the recent Jackson Hole Symposium in the US, stressed that the Central Bank’s focus remains on attaining the 2% inflation target. Lagarde’s stance was decidedly hawkish, emphasizing that the ECB’s priority remains to keep inflation constrained. Lagarde stated that interest rates will remain high as long as necessary to bring inflation back down to the ECB’s target.
A barrage of pessimistic EU economic data last week for the Eurozone decreased the likelihood of further rate hikes putting pressure on the Euro. Final GDP data for the Euro area were disappointing, showing that the Eurozone economy expanded by only 0.1%, in the second quarter of the year, against expectations of 0.3% growth. The Eurozone economy barely expanded in the second quarter after contracting by 0.1% in Q1 of 2023. The EU economy is struggling and cannot withstand much further tightening.
German industrial orders fell more than expected in July, as incoming orders dropped by 11.7% versus 4.0% anticipated. The Services sector in the Eurozone appears to be deteriorating, driving the Euro down. ISM Services PMI data released last week for some of the EU’s leading economies, and for the Eurozone as a whole, were disappointing. The Services sector remained in contractionary territory in August, with a print below the threshold of 50 that indicates industry expansion. August’s print of 47.9 was lower than July’s reading of 48.3, indicating that the health of the sector is deteriorating more rapidly.
In addition, the German balance of trade showed that exports are slowing in the eurozone’s largest economy. German trade balance dropped to 15.9B in July from 18.8B in June, falling short of expectations of a 17.6B print.
Flash CPI data for August showed that Euro Area headline inflation remained unchanged at 5.3% year-on-year against expectations of a drop to 5.1%. Core CPI, which excludes food and energy, however, dropped to 5.3% from 5.5% in July. Inflationary pressures in the Eurozone remain high, increasing the likelihood that the ECB will continue its policy of monetary tightening.
GBP/USD plummeted last week, closing near the 1.246 level on Friday. If the GBP/USD rate goes up, it may encounter resistance near 1.274, while support may be found near 1.244.
Monetary Policy Report Hearings last week cast doubt on future BOE rate hikes. Several MPC members thought that the BOE policy was restrictive enough already and that the British economy could not withstand further tightening. BOE Governor Andrew Bailey was less hawkish than anticipated, hinting that the BOE is approaching peak interest rates.
The BOE raised interest rates by 25 basis points at its latest policy meeting, bringing the bank rate to a 15-year high of 5.25%. Speaking at the annual Jackson Hole Economic Policy Symposium in the US, BOE Deputy Governor Ben Broadbent also stressed that monetary policy may have to remain in restrictive territory for some time yet. Market odds are in favor of another 25-bp rate hike in September followed by another in November.
High inflation in the UK is putting pressure on BOE policymakers to increase interest rates. Inflation in the UK is showing signs of cooling, demonstrating the effectiveness of the BOE’s consistently hawkish policy. Headline inflation dropped to 6.8% year-on-year in July from 7.9% in June. Core CPI, which excludes food and energy, remained steady at 6.9% though. Even though inflationary pressures in the UK are easing, inflation is still high, and policymakers are likely to continue raising interest rates to bring it down.
On the data front, UK Halifax House Price Index data last week showed that housing prices are declining by the largest percentage to date, putting pressure on the Sterling. The Halifax HPI index dropped by 1.9% in August against a 0.4% decline in July and expectations of a 0.1% drop. The Halifax index is an indicator of the housing industry’s health, and it is also a barometer of consumer spending and inflation.
Final Services PMI data released last week for the UK were optimistic, providing support for the Sterling. Services PMI data remained below the threshold of 50 which denotes industry expansion on Tuesday. August’s print, however, came in at 49.5, which was significantly higher than expected and higher than July’s print of 48.7. Even though the Services sector in the UK remains in contractionary territory, the deterioration of the sector is slowing down.
Britain’s economy unexpectedly expanded by 0.5% month-on-month in June after contracting by 0.1% in May, beating estimates of a 0.2% growth. Preliminary GDP estimates for the second quarter of the year were also optimistic, predicting a 0.2% growth from just 0.1% in the first quarter of 2023. The state of the British economy is still precarious though, as prolonged tightening has taken its toll on the labor market and other vital economic sectors.
The USD/JPY rose to a 10-month high last week, ending the week near the 147.8 level. If the USD/JPY pair declines, it may find support near 144.4. If the pair climbs, it may find resistance at 148.
The Yen has been weakening, pushed down by the BOJ’s ultra-accommodating monetary policy. The Yen’s weakness has been the subject of concern for Japanese authorities as it undermines the country’s importing potential and causes financial distress in households.
Japanese authorities have been repeatedly warning speculators against excessive short-selling of the Yen. The Yen’s continued weakness is raising market awareness of another intervention by the Japanese currency to support the ailing currency. Many market analysts view the USD/JPY 150 level as the line in the sand for another intervention.
Japan’s top currency diplomat Masato Kanda issued another warning on Wednesday, stating that the Japanese government has seen evidence of undesirable moves in the Forex market that cannot be explained by fundamentals and are intrinsically speculative. Kanda also stressed that authorities are prepared to act against excessive short-selling of the Yen. Japanese Finance Minister Shunichi Suzuki also warned speculators that a government intervention is possible if the Yen deteriorates even further.
The BOJ recently showed signs of relaxing its ultra-easy policy recently. The central bank maintained its short-term interest rate target steady at -0.10% at its latest policy meeting in July. The BOJ, however, has loosened its yield curve control. This will maintain the rate ceiling but effectively allow rates to float beyond the cap, allowing for rises by a further 50 basis points.
National Core CPI dropped to 3.1% in July from 3.3% in June. Inflation in Japan has remained above the BOJ’s 2% target for more than a year, encouraging the BOJ to tighten its monetary policy. BOJ Core CPI dropped slightly to 3.0% in July from 3.1% in June.
BOJ Governor Kazuo Ueda, speaking at the Jackson Hole symposium in the US defended the BOJ’s ultra-easy policy. Ueda stressed that underlying inflation in Japan remains below the BOJ’s target, indicating that a pivot in the central bank’s policy direction is not on the cards just yet.
Final GDP data for the second quarter of the year showed that the Japanese economy expanded by 1.2%, disappointing expectations of 1.4% growth. The final GDP Price Index showed a 3.5% annual expansion, versus 3.4% the previous quarter. Japan’s economic recovery increases the odds of a hawkish pivot in BOJ’s monetary policy.
Gold prices dipped last week, dropping from $1,947 to $1,915 per ounce, closing near $1,918 per ounce on Friday. If gold prices increase, resistance may be encountered near $1,953 per ounce, while if gold prices decline, support may be found near $1,885 per ounce.
Gold prices retreated last week as the dollar’s ascent weighed gold prices down. Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar gained strength last week, boosted by upbeat economic data and increased rate hike expectations. The dollar index rose to the 105 level for the first time since March and closed above this level on Friday. US Treasury yields remained firm, with the US 10-year bond yielding 4.27%.
Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise. The U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years.
The Fed’s aggressively hawkish policy over the past year has been paying off and inflationary pressures in the US are easing. Cooling US inflation rates have shifted market expectations towards a less hawkish direction. Strong US economic data this week, however, showed that the US economy is resilient, increasing the odds of future rate hikes and driving gold prices down.
Federal Reserve Chair Jerome Powell, recently speaking at the Jackson Hole Symposium in the US, warned that the Fed is prepared to raise interest rates further to bring inflation down. Most investors are anticipating a pause in rate hikes, but the US central bank has signaled that further tightening is possible if inflation does not go down consistently.
US inflation data coming up this week will likely affect the price of the dollar and consequently, gold prices as well. CPI data on the 13th and PPI data on the 14th will provide important information on US inflationary pressures. This week’s inflation data may play a decisive role in future Fed rate decisions.
Oil prices gained strength last week after the latest round of OPEC output cuts and WTI price rose to the $88 per barrel level. If WTI price declines, it may encounter support near $77.8 per barrel, while resistance may be found near $90.0 per barrel.
Supply concerns have been driving oil prices up. The OPEC+ alliance has been limiting oil production to keep oil prices up. Oil prices jumped to their highest level in ten months last week after Saudi Arabia and Russia announced new supply cuts. Saudi Arabia and Russia will extend production cuts that have already been in place for some months now, through the end of the year. Saudi Arabia has been reducing its output by one million barrels a day since early summer and Russia followed shortly after with a reduction of 300,000 barrels a day. Both countries were widely expected to extend the production cuts, but most analysts expected that this strategy would continue to be reviewed monthly and were taken by surprise by this move to extend them by three months.
US Crude oil inventories continued to decline last week after dropping sharply by 10.6M barrels the week before. The US Energy Information Agency reported a drop of 6.3M barrels on Thursday, exceeding expectations of a 1.8M barrel drop. Dwindling crude oil inventories provide support for oil prices.
Deterioration in China’s economic outlook is keeping oil prices down, however. Uncertainty over China’s economic recovery has put a cap on oil prices. China is the world’s largest importer and a weaker Chinese oil demand outlook has put pressure on oil prices. Recent data showed that China imported less oil in July, driving the oil demand outlook down.
The Fed’s hawkish monetary policy has reduced oil demand outlook, putting pressure on oil prices. The U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years. A pause in rate hikes seems likely this month, increasing oil demand outlook, and boosting oil prices. US inflation data this week on the 13th and the 14th may play a decisive role in future Fed rate decisions and are likely to affect oil prices.
Crypto markets were volatile last week on renewed rumors on Bitcoin ETFs. Reports of an imminent BlackRock ETF boosted Bitcoin price last week. Recent developments on the highly anticipated Bitcoin spot exchange-traded fund (ETF) applications have been causing ripples in crypto markets. Bitcoin spot ETFs would provide investors easier access to the asset and direct exposure to changes in the cash market. The Securities and Exchange Commission (SEC), however, has rejected a proposal from Grayscale to convert its Bitcoin Trust into a spot Bitcoin ETF. SEC has announced a delay in making any decisions on the issue until October, driving cryptocurrencies down.
Bitcoin price rallied on Thursday, reclaiming the $26,000 level but dropped back to $25,700 over the weekend. If BTC price declines, support can be found near $25,400, while resistance may be encountered near $26,400.
Ethereum also gained strength mid-week, rising to the $1,650 level but dropped back to $1,610 over the weekend. If Ethereum's price declines, it may encounter support near $1,600, while if it increases, resistance may be encountered near $1,750.
Strong economic data last week showed that the US economy is resilient, increasing the odds of future rate hikes and putting pressure on cryptocurrencies. Increases in central banks’ interest rates sour risk sentiment, driving risk assets down. The U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years.
Most investors are anticipating a pause in rate hikes, but the US central bank has signaled that further tightening is possible if inflation does not go down consistently. US inflation data this week on the 13th and the 14th may play a decisive role in future Fed rate decisions and are likely to affect crypto markets.
BTC/USD 1h Chart
ETH/USD 1h Chart
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