This week, financial markets are poised for significant movement, driven by key economic data releases and geopolitical developments. Fed Chair Jerome Powell’s dovish comments have sparked speculation of a rate cut in September, affecting the USD, gold, and cryptocurrencies. The USD index fell, and US Treasury yields declined last week. Meanwhile, political events in Europe and the UK, central bank policies, and economic data are shaping the outlook for the EUR and GBP. Japan’s economic struggles and the BOJ’s policies are under scrutiny, while supply concerns and geopolitical risks are influencing oil prices. Cryptocurrencies have exhibited high volatility due to changing rate cut expectations and geopolitical tensions.
USD Outlook
The USD experienced a dip last week, with the dollar index dropping from 106.0 to 104.9, and US Treasury yields also retreating. Fed Chair Jerome Powell’s comments indicating significant progress on disinflation have increased the likelihood of a rate cut in September, with market odds now above 75%. Mixed US labor data, with June NFPs exceeding expectations but May’s figures revised down, and a rise in the unemployment rate to 4.1%, have added to the uncertainty. Disappointing US service and manufacturing PMI data for June, indicating sector contractions, further pressured the dollar. This week, the focus will be on the US inflation report, with expectations that headline inflation will drop to 3.1% in June, potentially prompting the Fed to cut rates in September.
EUR Outlook
The Euro saw some upward movement last week, rising to the 1.084 level against the USD. Political turmoil in France, following Marine Le Pen’s party’s unexpected defeat in the second round of elections, has put pressure on the Euro. Additionally, the ECB’s decision to lower its Main Refinancing Rate by 25 basis points to 4.25% in June, combined with sticky Eurozone inflation, is likely to slow the pace of future rate cuts. Eurozone inflation eased to 2.5% in June, but Core CPI rose to 2.9%, indicating persistent inflationary pressures. The Eurozone economy showed minimal growth, with a 0.3% expansion in Q1, reflecting the region’s economic stagnation.
GBP Outlook
The Sterling gained strength after the Labour Party’s landslide victory in the British national elections, with GBP/USD rising to the 1.281 level. Keir Starmer’s Labour Party won a decisive majority, raising hopes for political stability in the UK. Positive British service data, with the Final Services PMI index rising to 52.1 in June, contrasted with disappointing manufacturing data. The BOE kept interest rates steady at 5.25%, with market expectations of a rate cut in September now at 70%. Easing price pressures, with headline inflation at 2.0% and Core CPI at 3.5% in May, indicate that the BOE’s hawkish monetary policy is yielding results. The British economy showed signs of improvement, with GDP expanding by 0.7% in Q1.
JPY Outlook
The Yen traded at 38-year lows last week, with USD/JPY touching the 161.9 level before dropping to 160.7. BOJ officials have been attempting to support the Yen, with Finance Minister Shunichi Suzuki hinting at possible intervention. However, market expectations of a hawkish shift by the BOJ were disappointed, as the central bank maintained its low interest rate policy. Rising inflation in Japan, with headline inflation at 2.5% and Core CPI at 2.1% in May, increases the likelihood of another rate hike later in the year. Preliminary GDP data showed Japan’s economy contracted by 0.5% in Q1, reinforcing concerns about a recession and limiting the odds of a BOJ hawkish pivot.
Gold Outlook
Gold prices surged last week, touching $2,390 per ounce, as the dollar weakened and US Treasury yields fell. Powell’s dovish comments increased the likelihood of a Fed rate cut in September, boosting gold prices. However, the uncertainty around the US Fed rate outlook continues to cause volatility. Geopolitical tensions, particularly in the Middle East, have also increased the appeal of safe-haven assets like gold. Concerns about the crisis in Gaza spreading to neighboring countries are supporting high gold prices.
Oil Outlook
Oil prices were volatile last week, with WTI rising to $84.6 per barrel mid-week before retreating to $83.2 per barrel. US crude oil inventories showed a significant drop, raising supply concerns and boosting oil prices. Seasonal demand in the summer months is also supporting prices, with market estimates indicating a peak in July. However, high central bank interest rates are limiting economic growth and oil demand. Renewed expectations of a Fed rate cut in September, following Powell’s comments, have provided some support. Geopolitical risks in the Middle East and OPEC+ production cuts extending into 2025 are also influencing the oil market.
Cryptocurrency Outlook
Bitcoin and other major cryptocurrencies exhibited high volatility last week, with Bitcoin plunging to a two-month low before rallying towards the end of the week. Ethereum followed a similar pattern. Central bank interest rates heavily influence cryptocurrency prices, with high rates restricting economic growth and putting pressure on risk assets. The US Fed’s unchanged interest rate policy and the high probability of a rate cut in September have been key factors. Geopolitical tensions, particularly the war in Gaza, have promoted risk aversion, impacting crypto markets. Hopes of a ceasefire deal in Gaza over the weekend boosted cryptocurrency prices.
