Weekly Market Outlook: August 19th - August 25th
Forex
USD
Persistent inflationary pressures in the US may prevent the Federal Reserve from cutting interest rates more aggressively in September.
The dollar was volatile last week, with the index rising from 102.3 to 103.2 mid-week then dropping to 102.4 on Friday. US treasury yields were also volatile the previous week, with the US 10-year bond dropping from 3.95% to 3.82% mid-week then rising to 3.89% on Friday.
US inflation is proving to be sticky despite the Federal Reserve’s efforts to bring it down to its 2% target. US CPI data on Wednesday showed that inflationary pressures in the US keep rising. Headline inflation cooled to 2.9% year-on-year in July from 3.0% in June against expectations of 3.0%. Monthly inflation, however, rose by 0.2% in July, which was in line with expectations, after shrinking by 0.1% in June. Core inflation, which excludes food and energy, rose by 0.2% in July after rising by just 0.1% in June.
Inflation data on Tuesday surprised on the downside, indicating that inflationary pressures in the US are easing. The Producer Price Index (PPI) rose by just 0.1% in July against expectations of 0.2% and a 0.2% print in June. Core PPI, which excludes food and energy, remained the same in July, against expectations of 0.2% growth and 0.3% growth in June.
The Federal Reserve kept interest rates steady at its latest policy meeting but signaled a rate cut in September. The US Federal Reserve kept interest rates unchanged at its policy meeting in July, within a target range of 5.25% to 5.50%, as expected. The US Federal Reserve has held interest rates steady since last July. The FOMC statement released after the meeting had a dovish bias, putting pressure on the dollar.
A 25-basis points rate cut in September is fully priced in. Market odds of a 50bps rate cut in September dropped from 50% to 25% after the release of the US inflation report, boosting the dollar. Persistent inflationary pressures in the US may prevent the Federal Reserve from cutting interest rates more aggressively in September.
The US economy is suffering from prolonged tightening, raising recession concerns. GDP data showed that the US economy expanded by 2.8% in Q2 of 2024, surpassing expectations of 2.0% growth. US economic growth in Q1, however, was revised downward, showing that the economy expanded by just 1.4% in the first quarter of the year.
This coming week the minutes of the latest Fed meeting will be released on Wednesday and may provide further insight on the Fed’s rate outlook. The Economic Policy Symposium in Jackson Hole, Wyoming, is starting on Friday. The symposium will last for two days and is likely to generate some volatility in Forex markets.
EUR
The Eurozone economy expanded by 0.3% in Q2 of 2024 according to Flash GDP data, which were in line with preliminary GDP data.
EUR/USD dipped from the 1.100 level to the 1.094 level on Thursday then rose to 1.102 on Friday. If the EUR/USD pair declines, it may find support at 1.088, while resistance may be encountered near 1.104.
The Eurozone economy expanded by 0.3% in Q2 of 2024 according to Flash GDP data, released on Wednesday, which was in line with preliminary GDP data. The Eurozone economy also expanded by 0.3% in the first quarter of 2024.
The EU ZEW Economic Sentiment index plummeted to 17.9 in August from 43.7 in July, missing expectations of 35.4. A print above 0.0 indicates market optimism, but a rapidly decreasing value shows declining sentiment. Moreover, the economic outlook for Germany is also declining, as evidenced by German ZEW Economic Sentiment data on Tuesday. Germany is the Eurozone’s leading economy, and its economic health affects strongly the EU as a whole. The German ZEW Economic Sentiment index dropped to 19.2 in August from 41.8 in July against expectations of 32.6.
The ECB kept interest rates steady at its monetary policy meeting in July, after lowering its Main Refinancing Rate by 25 basis points to 4.25% in June. ECB President Christine Lagarde has stated that the central bank’s policy will remain data-driven. Markets expect that the ECB will cut interest rates again in September. The central bank’s policy outlook, however, will likely depend on the progress of disinflation in the EU over the coming months. Eurozone inflation remains sticky and may slow down the pace of future rate cuts.
Eurozone inflation eased to 2.5% in June from 2.6% in May putting pressure on the Euro. Core CPI, which excludes food and energy, however, rose by 2.9% on an annual basis in June against expectations of a 2.8% print.
GBP
The British economy continues to grow but the rate of expansion is sluggish, raising the odds of a dovish BOE pivot in September.
GBP/USD surged from the 1.275 to the 1.294 level last week. If the GBP/USD rate goes up, it may encounter resistance near 1.304, while support may be found near 1.266.
The British economy continues to grow but the rate of expansion is sluggish, raising the odds of a dovish BOE pivot in September. GDP data on Thursday showed that the British economy remained stagnant in June, following a 0.4% expansion in May. Moreover, the British economy expanded by 0.6% in the second quarter of the year, which was in line with expectations, following 0.7% growth in the first quarter of 2024.
Price pressures in the UK remain high but rose less than expected in July according to British CPI data released on Wednesday. British headline inflation rose to 2.2% year-on-year in July from 2.0% in June but fell below expectations of a 2.3% print. Annual Core CPI, which excludes food and energy, also remained steady at 3.5% in June.
Jobs data on Tuesday showed that Britain's unemployment rate unexpectedly fell in June. The British unemployment rate dropped from 4.4% in May to 4.2% in July, against expectations of a rise to 4.5%. Claimant Count Change, on the other hand, which is the change in the number of people claiming unemployment-related benefits, rose sharply in July. Claimant Count Change spiked to 135.0K in July from just 36.2K in June, which will likely be reflected in July’s UK unemployment rate. In addition, wage growth slowed to 4.5% in the three months to June from 5.8% in May.
The BOE cut interest rates by 25 basis points at its monetary policy meeting in July. The BOE lowered its official rate from a 16-year high of 5.25% to 5.00%. BOE policymakers narrowly voted 5-4 in favor of a rate cut, putting pressure on the Sterling.
Market analysts predict that there will be at least one more 25bps BOE rate cut in 2024, bringing the total decrease in interest rates to 50bps for the entire year. Market odds of two more BOE rate cuts within the year, however, are declining, boosting the Sterling.
MPC policy member Catherine Mann, who is known for her hawkish stance and did not vote in favor of a rate cut at the latest meeting, warned over the weekend that inflation may rise again in the coming months. Mann stated that she is concerned that wage growth would bring inflation in the UK back up.
JPY
Preliminary GDP data for the second quarter of the year showed that the Japanese economy is expanding after slipping into recession in the previous quarter.
USD/JPY surged to the 149.4 level last week then pared gains and dropped to 147.5 on Friday. If the USD/JPY pair declines, it may find support near 141.7. If the pair climbs, it may find resistance near 149.8.
Preliminary GDP data for the second quarter of the year showed that the Japanese economy is expanding after slipping into recession in the previous quarter. Japan’s economy expanded by 0.8% in the second quarter after shrinking by 0.5% in the first quarter of the year against expectations of 0.6% growth. Japan’s improving economic outlook increases the odds of a BOJ hawkish pivot in the coming months.
The BOJ pivoted to a more hawkish policy at its meeting in July, raising interest rates by 15 basis points, the BOJ’s largest rate hike since 2007. The BOJ had already hiked interest rates in March, ending its negative interest rate policy. The BOJ raised interest rates further at its latest policy meeting, bringing its benchmark interest rate to 0.25% from 0.10%.
BOJ Governor Kazuo Ueda has expressed concern for the Yen’s weakness and has revealed that it was one of the reasons for the rate hike. Ueda left the door open for further rate hikes this year, stating that the BOJ does not see the 0.50% interest rate as a barrier to raising interest rates.
The disparity between the low BOJ interest rate and the high interest rates of other major central banks, especially the Fed’s, had driven the Yen into oversold territory in the past few months. By gradually closing the gap between its interest rate and that of other major banks, Japan was hoping to boost its ailing currency and avoid the need for another intervention to support the Yen. Japan’s attempt to boost the Yen, however, may have backfired, bringing down the country’s stock market.
Many investors have been engaging in the so-called carry trade, in which they borrowed in Japanese Yen at very low interest rates and invested the money in high-growth investments. After the BOJ raised interest rates, however, sparking the Yen’s recent rally, the Yen carry trade became less profitable and has been winding down, causing a domino effect in global stock markets.
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The Fed will likely cut interest rates in September, while the BOJ may not have finished its hiking cycle yet. As the difference in interest rates between the BOJ and the Fed is reduced, carry trade will become even more unfavorable. Market analysts expect that the carry trade will unwind further over the next few months, causing volatility in Forex markets and stock markets.
Inflation in Japan remains weak but rising. Headline inflation rose to 2.5% year-on-year in May from 2.2% in April. BOJ Core CPI rose to 2.1% on an annual basis in May from 1.8% in April, exceeding expectations of 1.9%. Rising inflation in Japan increases the odds of another BOJ rate hike later in the year. Tokyo Core CPI rose to 2.1% year-on-year in June from 1.9% in May against estimates of a 2.0% reading.
Gold
Gold prices skyrocketed to an all-time high last week as the dollar weakened and tensions remained high in the Middle East.
Gold prices surged above the all-time high of $2,500 per ounce last week. If gold prices rise, resistance may be encountered near the psychological level of $2,550 per ounce, while if gold prices decline, support may be encountered near $2,360 per ounce.
Gold prices skyrocketed to an all-time high last week as the dollar weakened and tensions remained high in the Middle East. Gold prices have been typically directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar was volatile last week, with the index rising from 102.3 to 103.2 mid-week then dropping to 102.4 on Friday. US treasury yields were also volatile the previous week, with the US 10-year bond dropping from 3.95% to 3.82% mid-week and rising to 3.89% on Friday.
Gold prices are affected by central banks’ interest rates. A restrictive monetary policy hinders economic growth lowering the global economic outlook and putting pressure on gold prices. The Federal Reserve kept interest rates steady within a target range of 5.25% to 5.50% at its latest policy meeting but hinted at a rate cut in September. The FOMC statement released after the meeting had a dovish bias, boosting gold prices.
A 25-basis points rate cut in September is fully priced in. Market odds of a 50bps rate cut in September dropped from 50% to 25% after the release of the US inflation report. US CPI data on Wednesday showed that inflationary pressures in the US keep rising. Monthly inflation rose by 0.2% in July after shrinking by 0.1% in June. Sticky inflationary pressures reduce the odds of a more aggressive rate cut in September, putting pressure on gold prices.
Geopolitical tensions raise the appeal of safe-haven assets boosting gold prices. Concerns that the crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets keeping gold prices high. Talks between Israel and Hamas on a ceasefire deal are not progressing and continued attacks by Israel in Gaza may escalate the crisis further. Tensions between Israel and Iran mount, raising the demand for safe-haven assets.
Oil
Diminishing oil demand outlook drove oil prices down last week as OPEC cut its demand growth forecast for 2024.
Oil prices edged higher on Thursday, with WTI price rising from $77.1 to $78.2 per barrel then dropping to $76.5 per barrel on Friday. If oil prices retreat, they may encounter support near $72.1 per barrel, while resistance may be found near $80.2 per barrel.
The ongoing crisis in the Middle East threatens to disrupt oil distribution. Tensions in the area raise concerns that hostilities may spread further in the Middle East, affecting oil supply and distribution. Talks between Israel and Hamas on a ceasefire deal are not progressing and continued attacks by Israel in Gaza may escalate the crisis further. Tensions between Israel and Iran mount, raising the demand for safe-haven assets. Concerns that Iran could attack Israel this week are driving oil prices up.
Diminishing oil demand outlook drove oil prices down last week. OPEC cut its demand growth forecast for 2024 on Monday, putting pressure on oil prices. In addition, the International Energy Agency (IEA) maintained its modest oil demand forecast on Tuesday. The IEA kept its oil demand growth forecast at less than 1 million bpd in 2024 and 2025 citing low demand from China.
Oil prices are kept in check by high central banks’ interest rates. The US Fed is keeping interest rates at a 23-year high, restricting economic growth and limiting the oil demand outlook as a result. The Federal Reserve kept interest rates steady within a target range of 5.25% to 5.50% at its latest policy meeting but signaled a rate cut in September.
A 25-basis points rate cut in September is fully priced in. Market odds of a 50bps rate cut in September dropped from 50% to 25% after the release of the US inflation report, putting pressure on oil prices.
US CPI data on Wednesday showed that inflationary pressures in the US keep rising. Monthly inflation rose by 0.2% in July after shrinking by 0.1% in June. Sticky inflationary pressures reduce the odds of a more aggressive rate cut in September, limiting oil demand outlook.
OPEC+ has decided to extend most of its voluntary production cuts into 2025 to boost oil prices. OPEC, however, announced that it would gradually phase out oil production cuts and laid out plans for restoring production levels within 2025.
Cryptocurrencies
Major stock markets for the most part held steady this week, providing support for crypto markets.
Bitcoin traded sideways last week, oscillating around the $59,000 level. If BTC price declines, support can be found at $54,500, while resistance may be encountered near $62,800.
Ethereum price dropped to the $2,600 level last week. If Ethereum's price declines, it may encounter support near $2,510, while if it increases, resistance may be encountered near $2,770.
Cryptocurrency prices are affected by central banks’ interest rates. High interest rates are restricting economic growth putting pressure on risk assets, while the promise of rate cuts boosts crypto markets. Federal Reserve kept interest rates steady within a target range of 5.25% to 5.50% at its policy meeting in July but signaled a rate cut in September.
A 25-basis points rate cut in September is fully priced in. Market odds of a 50bps rate cut in September dropped from 50% to 25% after the release of the US inflation report, putting pressure on crypto markets.
US CPI data on Wednesday showed that inflationary pressures in the US keep rising. Monthly inflation rose by 0.2% in July after shrinking by 0.1% in June. Sticky inflationary pressures reduce the odds of a more aggressive rate cut in September, putting pressure on crypto markets.
Crypto markets have been known to follow the overall trends of stock markets, especially of tech stocks. Global stock markets suffered a huge sell-off last week but rebounded towards the end of the week. Major stock markets for the most part held steady this week, providing support for crypto markets.
Fluctuating risk sentiment is causing volatility in crypto markets. Crypto markets have been under pressure by the war in Gaza. Fears that the war will spread in the Middle East are promoting a risk aversion sentiment putting pressure on risk assets such as cryptocurrencies. Tensions in the area raise concerns that hostilities may spread further in the Middle East. Talks between Israel and Hamas on a ceasefire deal are not progressing and continued attacks by Israel in Gaza may escalate the crisis further. Concerns that Iran could attack Israel this week are lowering the appeal of risk assets.
Read the full article for more information, and take a look at this week's important Forex calendar events.
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