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Another surprise for the Fed

Once again, the US economic releases have surprised investors by going against market expectations. This has maintained hopes in the market for a sooner rate cut by the Federal Reserve. It is despite the fact that just two days ago, the Federal Reserve adjusted its expectations, announcing only one rate cut this year instead of three.

The US PPI data revealed another surprise, providing further evidence that inflation is headed in the right direction. However, there is also growing evidence that the labor market is cooling, as jobless claims increased last week.

Indicator Forecast Actual Prior
Jobless Claims 225K 242K 229K
Continuing Claims 1795K 1820K 1790K
PPI MoM 0.1% -0.2% 0.5%
Core PPI MoM 0.3% 0.0% 0.5%
PPI YoY 2.5% 2.2% 2.3%
Core PPI YoY 2.5% 2.3% 2.5%

Jobless claims surged to the highest level since August of last year, while continuing claims reached their highest level since January of this year.

In terms of the Producer Price Index (PPI) data, the month-over-month (MoM) PPI showed the largest decrease since October of last year, while the MoM Core PPI remained unchanged. The year-over-year (YoY) PPI slowed slightly to 2.2%, despite expectations for an increase to around 2.5%. Additionally, the Core PPI YoY also decelerated to 2.3%, marking the first slowdown in four months.

Fed Fund Futures price more than two rate cuts

Despite the recent change in the Federal Reserve’s dot plot, which now shows a possibility of one rate cut instead of three rate cuts, the Fed Fund Futures are indicating a different outlook. They are currently pricing in 2.7 rate cuts this year, with the probability for rate cuts in November and December both above 100%. Additionally, after the release of the PPI and Jobless Claims data, the probability of a rate cut in September has once again risen to 75%.

The fluctuation in market expectations regarding the Federal Reserve’s policy is likely to keep the FX market within the same range until the Fed actually starts cutting rates. The upcoming data will be the guide for investors to anticipate the timing of the first rate cut.

More data ahead

Indicator Forecast Prior
Import Prices MoM -0.1% 0.9%
Export Prices MoM 0.1% 0.5%
UoM Consumer Sentiment 72.0 69.1
UoM 1-Year Inflation Expectations 3.2% 3.3%
UoM 5-10 Year Inflation Expectations 3.0% 3.0%

During the US session today, another set of economic figures will be released. If the figures miss estimates, similar to what we saw with the inflation data and PPI data this week, it is likely to further increase market expectations of a rate cut in September.

DXY above 105.0 once again

The US Dollar Index has recovered its losses that occurred after the CPI data was released. It continued to rise earlier today, reaching as high as 105.52, despite yesterday’s economic releases. This has led technical indicators to turn more bullish on the daily chart.

In the meantime, the next resistance area is at 105.67. It should be watched closely. A break above that resistance would pave the way for further gains, possibly towards 106.0 followed by 106.35.

Bank of Japan not doing much

The Bank of Japan has decided to keep its current policy unchanged, which has disappointed bond investors. However, the Bank of Japan governor stated in a press conference that there will be a substantial reduction in bond buying. Additionally, he mentioned that there is a possibility of raising rates next month depending on upcoming data.

USDJPY surged to 158.0 after the decision but dropped back below 157.50 during the Bank of Japan (BoJ) governor’s press conference. It is evident that the Bank of Japan is engaging in a lot of talk with little action. This increases the likelihood of further declines in JPY and opens the door for additional interventions. Traders should exercise caution as volatility is expected to persist.

 

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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