In July, inflation edged up slightly, with the personal consumption expenditures (PCE) price index rising 0.2% monthly and 2.5% annually, matching the forecast. Core PCE, excluding food and energy, increased by 0.2% monthly and 2.6% annually, slightly below the 2.7% estimate. Personal income grew by 0.3%, while consumer spending increased by 0.5%.
The market is anticipating the Federal Reserve's first interest rate cut in over four years, with expectations leaning towards a 25 basis point cut. This data supports the Fed’s goal of balancing inflation with economic growth and the labour market. The upcoming August jobs report will be closely watched for further insights.
EURO
Eurozone inflation fell to a three-year low of 2.2% in August, down from 2.6% in July, according to Eurostat. The core inflation rate, excluding volatile items like energy and food, decreased to 2.8% from 2.9%. This decline aligns with economists' forecasts and supports expectations for a September rate cut by the European Central Bank (ECB). Despite the drop in headline inflation, core inflation is expected to remain above 2.5% for the rest of the year due to persistent pressures in goods and services. The ECB is expected to lower interest rates by 25 basis points in September, with another cut possible by year-end. However, concerns remain over services inflation, which stands at 4.2% and has been persistently high. Some analysts caution that the underlying inflation pressures might still be significant despite the overall decrease in inflation.
EURUSD (Daily). Due to the poor performance of the USD, the Euro managed to strengthen to 1.1200. However, last week, it seemed to lose momentum and the exchange rate is likely to return to 1.0900, its demand area and the 50% Fibonacci correction level.
YEN
The Bank of Japan (BOJ) is expected to continue tightening monetary policy due to rising inflation in Tokyo. Tokyo's headline inflation hit 2.6% in August, up from 2.2% in July, with core inflation at 2.4%. Market views differ on the timing of the next rate hike: Moody’s Stefan Angrick anticipates a hike in October and another in 2025, while Mizuho's Kazuo Momma expects the BOJ to hold rates steady in October, with possible hikes in January and July.
Current inflation is influenced by fluctuating government subsidies and a weak yen, but underlying inflation might fall below 2% soon. BOJ raised rates to 0.25% in July.
USDJPY (Daily). After BOJ’s intervention on July 11 and a rate hike on July 31, this pair fell 12%, the deepest price decline this year. This pair is currently trading sideways between 141.70 and 149.50.
OIL
US crude oil futures rose nearly 2% on Thursday after Libya reported significant disruptions to its oil production, which has fallen by 1.5 million barrels over three days. Production disruptions in Libya are expected to last several weeks, with estimates of 900,000 to 1 million barrels per day being impacted.
US crude prices are up 5.9% year-to-date. The rise in oil prices is attributed to Libyan production issues, geopolitical risks in the Middle East, and low US crude oil storage levels. However, caution is advised as OPEC+ might increase production in October, and demand concerns in China could influence future price movements.
WTIUSD (Daily). Failing to bounce and touch the dynamic resistance at 81.50, oil seems to be reversing and is likely to test the support level around 72.00 again. The mixed effects of the fundamentals make buyers adopt a “wait and see” approach.
GOLD
Gold price softened on Friday as the dollar and Treasury yields strengthened following US inflation data that met expectations. Gold fell 0.7% to $2,503 per ounce. Despite this, gold is on track for a 2% monthly gain, driven by expectations of a September interest rate cut by the Federal Reserve. Market expectations for a 25-basis-point rate cut have increased to 69%, with a 50-basis-point cut seen as less likely. Physical demand for gold remains weak, particularly in China, despite new import quotas.
XAUUSD (H4). Failing to break through resistance several times in the last 2 weeks, the all-time high of $2,530 looks tough until the next FOMC meeting. The price had a retracement on the last trading day and we expect Gold to be trading between $2,480 and $2,530 this week.
Fullerton Markets Research Team
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