As we embark on a new week in the financial markets, investors should be vigilant about several key issues that are poised to influence market dynamics. The US Federal Reserve’s interest rate outlook continues to be a significant driver of market sentiment, with recent data releases and hawkish rhetoric from Fed officials shaping expectations. Geopolitical tensions in the Middle East, particularly involving Israel and Hezbollah, remain a critical factor, impacting safe-haven demand and commodity prices. Additionally, political developments in Europe, especially in France, and a packed economic calendar with crucial data from the US, UK, Eurozone, and Japan will provide further insights into economic conditions and potential market movements.
USD
The US dollar experienced mixed performance last week, initially edging higher but retreating towards the end. The dollar index reached a high of 106.1 before falling to 105.9 on Friday, supported by strengthening US treasury yields, with the 10-year bond yield ending the week at 4.40%. Several key economic indicators released last week influenced the dollar’s volatility.
The Core PCE Price Index, a key measure of inflation favored by the Federal Reserve, rose by 0.1% in May, in line with expectations. The annual rate cooled to 2.6% from 2.8% in April, signaling easing price pressures. Final GDP data for Q1 showed a 1.4% expansion, consistent with expectations but a slowdown from previous quarters. Durable Goods Orders in May rose by 0.1%, surpassing forecasts, though Core Durable Goods Orders fell by 0.1%.
Consumer confidence data exceeded expectations, with the CB Consumer Confidence index at 100.4 in June, despite a decline from 101.3 in May. The Federal Reserve maintained interest rates at 5.25%-5.50% in June, with hawkish rhetoric from FOMC member Michelle Bowman indicating no rate cuts are expected this year. Market expectations for a rate cut in September are below 70%, while a November cut is fully priced in, contributing to continued forex market volatility.
This week’s key data releases include US manufacturing and services PMI, JOLTS Job Openings, unemployment claims, and the highly anticipated Non-Farm Payrolls (NFP) report on Friday, providing crucial insights into the US labor market and economic growth.
EUR
The Euro remained under pressure amid political instability in France ahead of national elections. EUR/USD traded sideways around 1.071, with support at 1.067 and resistance at 1.075. The ECB lowered its Main Refinancing Rate by 25 basis points to 4.25% in June, while inflation remains sticky, potentially slowing future rate cuts.
German business morale declined, with the IFO Business Climate index falling to 88.6 in June. Headline inflation in the Euro Area accelerated to 2.6% in May, while Core CPI rose to 2.9%, indicating persistent inflationary pressures. The Eurozone economy expanded by 0.3% in Q1, consistent with preliminary estimates but slower than previous quarters.
GBP
GBP/USD exhibited volatility last week, settling at 1.264 on Friday. Political stability hopes, fueled by expectations of a Labour Party victory in the July 4th elections, supported the sterling. The UK economy showed signs of improvement, with GDP growth of 0.7% in Q1. The BOE maintained its interest rate at 5.25% in June, with market expectations for a rate cut in September around 70%.
UK inflation eased to 2.0% annually in May, aligning with BOE forecasts. Core CPI fell to 3.5%, reducing pressure on the BOE to maintain a restrictive policy. British inflation dropping to target for the first time in nearly three years signals the effectiveness of the BOE’s hawkish policy.
JPY
The Yen continued to decline, with USD/JPY rising above 161.0 before closing near 160.8. BOJ officials, including Governor Kazuo Ueda, have issued warnings against speculative short selling. The BOJ maintained its policy settings in June, with some members favoring a rate hike soon. Inflation in Japan remains weak but rising, with headline inflation at 2.5% and BOJ Core CPI at 2.1% in May.
Japan’s economy slipped into recession in Q1, shrinking by 0.5%, limiting the odds of a BOJ hawkish pivot. Governor Ueda hinted at easing bond purchasing at the next meeting, but no specifics were provided.
Gold
Gold prices were volatile, closing near $2,330 per ounce on Friday. The dollar’s movement and central bank interest rates influence gold prices. The US Federal Reserve’s unchanged rate policy and increasing rate cut expectations boosted gold last week. Geopolitical tensions, especially in the Middle East, continue to support safe-haven demand for gold.
Oil
Oil prices edged higher, with WTI closing at $81.8 per barrel. US crude inventories showed a surprise build, putting pressure on prices. Geopolitical risks and seasonal demand support oil prices. The US Federal Reserve’s interest rate policy and OPEC+ decisions on production cuts also impact the market.
Bitcoin and Major Cryptocurrencies
Crypto markets faced pressure, with the global market cap dropping to $2.28 trillion. Bitcoin reclaimed the $62,000 level, while Ethereum traded around $3,430. Central bank interest rates and geopolitical tensions in the Middle East influence crypto market volatility. The US Fed’s unchanged interest rate policy and expectations of rate cuts also play a significant role.
