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Weekly outlook: Will US CPI and FOMC spur or stop the USD’s accent?

Alejandro Zambrano Alejandro Zambrano 10/06/2024
Weekly outlook: Will US CPI and FOMC spur or stop the USD’s accent? Weekly outlook: Will US CPI and FOMC spur or stop the USD’s accent?
Weekly outlook: Will US CPI and FOMC spur or stop the USD’s accent? Alejandro Zambrano

As we start the new week, last week's data and events continue influencing the markets. The key message from the US economy is that it is performing much better than expected. Services, the largest sector of the US economy, is doing great with the ISM Services PMI, which increased to 53.8, higher than the expected 51.
 

Additionally, wage growth came in at 0.4% month-to-month, significantly higher than the prior 0.2% and the anticipated 0.3%. Furthermore, the non-farm payrolls report indicated that 273,000 new jobs were created, substantially higher than the expected 183,000.
 

On the weaker side, the unemployment rate increased to 4% from 3.9%, and Manufacturing is underperforming and shrinking, with the PMI coming in at 48.7, lower than the prior 49.2 and the anticipated 49.8. With the US economy performing better than expected and wage growth accelerating, the dollar gained strength, cryptocurrencies dropped, and the EUR/USD pair pushed lower.
 

EUR/USD was also hampered by a rate cut from the European Central Bank (ECB), which reduced rates from 4.5% to 4.25%. The ECB is now indicating a data-dependent approach. The reasoning is straightforward: inflation remains too high, and the unemployment rate is meagre. Despite this, banks continue to speculate, with analysts anticipating another rate cut in September and December.
 

Adding to the global economic landscape, the Bank of Canada also made a significant move by reducing rates by 25 basis points to 4.25%. This decision was influenced by the annual headline inflation rate of 2.7%, coupled with a rising unemployment rate of 6.2% and weak GDP growth at 0.4%. These factors put the CAD at a potential risk of decline in the coming weeks, a situation that traders and investors should be cautious about.
 

As we head into the new week, it is fair to assume that EUR/USD will be sold on bounces, given the ECB's rate cuts and the stronger-than-expected US economy. We will also await more data from the US economy, with US headline inflation anticipated to drop from 3.4% to 3.3%. This data is expected on Wednesday at 13:30 London time.
 

The Federal Reserve rate meeting is scheduled for the same day at 19:00. US interest rates will likely remain unchanged at 5.5%, given the strong economy. Speculation suggests that the Fed's dot plot may indicate a preference for cutting rates twice instead of three times, aligning closer to market expectations. The market anticipates the first-rate cut may occur in September 2024.
 

Among the key events on the horizon, the Bank of Japan rate meeting stands out. While no major changes are expected, it is crucial for traders and investors to stay vigilant. Given the robust US economy and the bullish trend in USD/JPY, it is plausible that the Japanese Yen could further weaken. However, it's important to always factor in potential volatility, particularly due to the high risk of intervention.
 

All times in BST

 
  • Tuesday: UK Claimant Count Change 07:00​.

  • Wednesday​: UK GDP 07:00​, US CPI 13:30​, and FOMC at 19:00​

  • Thursday​: AU Unemployment rate 02:30, and US PPI at 13:30​.

  • Friday:​ Bank of Japan rate meeting, no specific time, and Prelim UoM Consumer Sentiment 15:00.
     

Market Analysis: Key Developments and Trends

 

EUR/USD



 

The combination of an ECB rate cut and stronger-than-expected US wage growth and non-farm payroll data has turned the EUR/USD bearish. Previously aiming to push higher and break out from a cup and handle pattern, the price has now traded below the 1.0782 level, the most recent swing low on the daily chart. The price might potentially drift lower to 1.0722, followed by 1.0646. The short-term trend will remain bearish, below last week's high of 1.0900.

 

USD/JPY



 

The price is stuck in a triangle pattern ahead of critical US consumer price data and the Federal Reserve rate meeting. The triangle pattern is bullish, and the overall trend remains bullish. Given the upcoming data and the Bank of Japan rate meeting on Friday, a breakout might occur. The triangle itself suggests that the price could head substantially higher, potentially reaching 163.02 on a break to 157.75. A push towards 163.00 would mark a new 2024 high, and there is a high risk of intervention by the Japanese central bank.
 

Brent crude oil (BRENT)



 

Last week, we noted that the price of Brent crude oil was bearish, and indeed, the price declined. Today, the bearish trend continues, but instead of being bearish below 84.82, the trend is now bearish below 81.64. The price might drift lower again and potentially reach last week's low around 76.50.
 

Gold (XAUUSD)



 

Gold prices have dipped to the $2298 to $2265 area, the last line of defense for the bulls. If prices trade below 2265, it is likely that gold would have created a major high, potentially declining to $2200. In a worst-case scenario, gold could give back a significant portion of its 2024 gains.
 

Dow Jones Industrial Average Index (US30)



 

The Dow Jones bounced as expected between 38,276 and 37,595, almost reaching the first resistance level at 39,153. As of today, the price has bounced as anticipated but has not pushed high enough to declare last week's low as a new trend-defining level. Therefore, the outlook remains unchanged compared to last week.
 

With the Fed set to meet this week, will markets react as expected or will they shock the markets? Log in to trade now!

Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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