The upcoming FOMC meeting minutes have been considerably hyped up, placing this week’s market theme on Jackson hole symposium. Especially with greenback’s current strength holding firm near 20-year highs at $109.
Traders have actively split their votes between the next rate hike to 56.5% hedging for a 75 bps increase while 43.5% of traders think the Fed will slow-down the pace to 50 bps, the split comes in after inflation figures from the month of July prints a softer reading of 8.5% opposing the 9.1% from the month of June. Leading markets to believe that the Fed will ultimately slowdown the pace of rising interest rates in order not to hurt economic growth meanwhile several other Fed officials have strongly stated they support a 75 bp increase. In addition to positive retail sales data, that has shown signs of improving U.S. economy growth, leaving markets to split their votes.
Adding to that, Yesterdays Prelim U.S. GDP figures reading showed a slower than expected economic contraction (for the second successive quarter). With a reading of -0.6 vs -0.9% previous. Which again only indicates signs of a strengthening economy with less chances of recession and the like hood of the Federal Reserve continuing its aggressive pace of interest rates. U.S. jobless claims also fell for a second straight week.
Possible Scenarios
A hawkish clue from Fed Chair Powell on the resilience of 40-year high inflation is likely to raise the dollars momentum above level of $109. Hurting the euro, sending it again below parity and the GBP going back to testing the 47-year lows previously hit in 2020. Gold will also move to the next support levels of $1740 and $1738, with the possibility of breaching these levels further depending on the statement, as it struggles to stay above $1745.
A dovish clue from Fed Chair Powell, will likely result in the dollars pullback to levels of $108 and $107. Giving the euro and the pound room for a breather. While investors will head to the safe haven metal for uncertainty concerns, with gold likely to break through the resistance of $1765 and if bulls power through, gold can go past $1770 as well, since it will be at the same time after the bell of the U.S. session.
In the meantime, Markets surprisingly continue to hold firm even as Europe’s energy crisis gets worse. With U.K. households set to pay 3 times as much for energy in winter as they did in the last one. And as Citigroup warns of rising inflation all the way to 18% due to the rise in fuel bills if the government does not intervene.
In Commodities, Oil prices have been increasingly vulnerable to everchanging supply and demand fluctuations. As Saudi Arabia warns of supply cuts and at the same time, U.S. and Iran try to reach an agreement to lift oil sanctions, leaving oil prices heavily volatile within a broad range. WTI has been ranging between levels of $95 to $86. While Brent has been ranging between $101 and $92. OPEC+ meetings next month will also set the tone in hopes for a steadier price action.
By next week, markets will continue to price in the Jackson hole and Powell speech synopsis and Core PCE inflation indicator whilst anticipating the upcoming non-Farm payroll data due next Friday and also keeping an open mind for the next ECB monetary policy meeting on September 8, whereas markets have already priced in a 50 basis point rate hike to tackle red hot inflation.
