The markets are anticipated to behave differently this week compared to previous weeks, driven by upcoming news and economic decisions from Europe, China, and especially the United States. 

The primary focus will be on the Fed Chairman's press conference next Wednesday, where the first interest rate cut is expected to be confirmed for the September meeting. However, there could be a surprise if no mention is made of the expected date, particularly since inflation remains above 3%. 

The attached chart shows that the current inflation rate of 3% might encourage the Fed to lower interest rates soon, especially since they have remained stable between 3.7% and 3% for over a year. Any reading below 3% would further confirm that the Fed will likely reduce interest rates at least once this year.

 

 

                                                                     Figure 1: US Inflation Data, Bureau of Labor Statistics

On the other hand, as praised by the Fed, employment rates demonstrate the strength of the US economy. The attached chart shows the stability of employment rates, with monthly job additions ranging between 150K and 300K for over a year. This will be confirmed when the NFP is released next Friday. Additionally, the GDP growth rate of 2.8% in the second quarter of this year, compared to 1.4% in the first quarter, supports the Fed’s statements in previous meetings about the strength of the US economy or at least the avoidance of an expected recession.

 

                                                                                        Figure 2: US NFP, Bureau of Labor Statistics

The markets expect Powell to indicate that he is prepared to cut interest rates at the September meeting, provided that the inflation and employment readings leading up to the next meeting support such a decision. However, he may also suggest that this does not necessarily mean a shift to a more accommodative monetary policy, as future decisions will be based on the economic data.

All of this leads us to anticipate significant price fluctuations, especially since many assets are currently trading near critical levels identified by technical analysis that could influence price trends for the rest of the year. Generally, the short-term expectations for this week as per analysts are as follows:

Any hints of a rate cut in September are expected to be negative for the US dollar but positive for gold and stocks. Conversely, if there is no indication of a rate cut in September, it is expected to be positive for the US dollar and negative for gold and stocks. Additionally, the NFP report on Friday will significantly influence the Fed's decisions at the September meeting

It's important to consider the following key points:

  • The Fed is cautious about quickly reducing interest rates, as this might lead to persistent inflation.
  • The exact final interest rate needed to bring inflation down to 2% remains uncertain.
  • There are currently no clear signs of a sustainable decline in the inflation rate