The upcoming week in financial markets is expected to be dynamic, with significant economic data releases and geopolitical events likely to drive market movements. The USD saw a notable decline following a lower-than-expected inflation report, boosting the odds of a Fed rate cut in September. Meanwhile, political instability in France and a crucial ECB meeting are influencing the EUR. The GBP is benefiting from political stability and positive economic data, while the JPY is reacting to intervention speculation and weak domestic economic indicators. Gold and oil prices are being shaped by fluctuating rate cut expectations and geopolitical tensions, and cryptocurrencies are showing volatility amidst these developments.
USD Outlook
The USD fell sharply last week, with the dollar index dropping to 104.2 following a lower-than-expected US inflation report. Headline inflation cooled to 3.0% year-on-year in June from 3.3% in May, with monthly inflation shrinking by 0.1%. Core inflation rose by just 0.1% in June, indicating easing inflationary pressures, which have bolstered expectations for a Fed rate cut in September, now above 90%. However, the Producer Price Index (PPI) data exceeded expectations, suggesting that the disinflation process may not be smooth. Consumer sentiment fell to an eight-month low, further complicating the economic outlook. This week, market participants will closely monitor the release of additional economic indicators and Fed Chair Jerome Powell’s testimony for further clues on monetary policy direction.
EUR Outlook
The EUR/USD pair moved upwards last week, reaching the 1.090 level as the dollar weakened. Political turmoil in France, following inconclusive national elections, has put pressure on the Euro. This week’s European Central Bank (ECB) meeting on July 18th is critical, with the ECB expected to maintain interest rates but provide guidance on a potential rate cut in September. Eurozone inflation data showed a slight easing, but core inflation remains stubbornly high. The Eurozone economy’s sluggish growth, with just a 0.3% expansion in Q1, highlights the challenges faced by the ECB in navigating its monetary policy amidst political and economic uncertainty.
GBP Outlook
The GBP benefitted from the USD’s weakness, with GBP/USD rising to a four-month high of 1.296. The Labour Party’s recent electoral victory has raised hopes for political stability in the UK, boosting the Sterling. The Bank of England (BOE) maintained interest rates at 5.25%, and markets are now pricing in a 70% chance of a rate cut in September. BOE chief economist Huw Pill’s comments on persistent price pressures reduced rate cut odds, supporting the Sterling. Positive GDP data, showing a 0.4% expansion in May, indicate economic improvement, further diminishing the likelihood of a dovish pivot by the BOE in the near term.
JPY Outlook
The JPY experienced significant volatility last week, with USD/JPY dropping from near a 38-year high of 162.0 to 158.0, fueling speculation of government intervention. The Yen’s sudden spike followed the release of the US inflation report. The Bank of Japan (BOJ) has been under pressure to support the Yen, with officials warning against speculative short selling. Despite a pivot to a more hawkish policy earlier this year, the BOJ’s interest rates remain significantly lower than those of other major central banks. Rising inflation in Japan increases the odds of another rate hike, but recession concerns, with GDP data showing a contraction in Q1, limit the likelihood of aggressive monetary tightening.
Gold Outlook
Gold prices surged to $2,420 per ounce last week as the USD weakened following the US inflation report, which bolstered expectations of a Fed rate cut in September. The decline in US Treasury yields also supported gold prices. Despite these gains, gold faces potential volatility due to central bank interest rate decisions and geopolitical tensions. The People’s Bank of China’s halt in gold purchases has exerted downward pressure on prices, but ongoing geopolitical risks, particularly in the Middle East, continue to support demand for safe-haven assets.
Oil Outlook
Oil prices were volatile last week, with WTI fluctuating around $82.5 per barrel. US crude stockpiles showed an unexpected drop, boosting prices, while renewed rate cut expectations following the US inflation report provided additional support. Seasonal demand and concerns over potential disruptions from hurricane Beryl further influenced prices. However, easing supply concerns as the US oil infrastructure remained largely intact post-hurricane and hopes of a ceasefire in Gaza have tempered gains. OPEC+’s decision to extend production cuts into 2025 also plays a significant role in shaping the oil market outlook.
Cryptocurrency Outlook
Cryptocurrencies, including Bitcoin and Ethereum, exhibited high volatility last week, gaining strength following the US inflation report that raised expectations for a Fed rate cut in September. Bitcoin rose to $61,000, and Ethereum climbed to $3,200 over the weekend. Central bank interest rates heavily influence cryptocurrency prices, with high rates restricting economic growth and putting pressure on risk assets. Geopolitical tensions, particularly the conflict in Gaza, have also impacted crypto markets, promoting risk aversion. However, hopes for a ceasefire have provided some relief, boosting prices towards the end of the week.
