The past week proved ambiguous for global markets in terms of determining what to expect for the US economy in the near future and whether the significant deterioration in the US labor market will actually prompt the central bank to reduce interest rates more aggressively.
Last Friday, I suggested that if the jobs data released on that day turned out to be below forecast, the Federal Reserve might cut the key interest rate not by 0.25%, but by 0.50% at once. But the report revealed not just a miss, but a catastrophic drop in job growth to 22,000 in August versus a forecast of 75,000. And even though July's figures were revised upward to 79,000, that's still very little. It was then that the business press began to speculate that the central bank might cut rates by 0.50% at once, citing the dire state of the US job market.
By the way, this morning, fed funds futures show a 100% probability of a 0.25% key rate cut, but in addition, there is now a 10% expectation that the rate could be sharply reduced by 0.50%. In my opinion, this is quite a high probability, considering that extremely bad labor market news came out on Friday and not all American traders have "woken up" yet.
However, negative news has also increased concerns that the economy may begin to stagnate and could face stagflation, where slowing growth is accompanied by rising inflation. This week, inflation reports come to the forefront, with the producer price report (PPI) due on Wednesday and the consumer price index (CPI) on Thursday. It is expected that the PPI will show a notable drop month-on-month, from 0.9% in July to 0.3% in August. At the same time, the overall CPI may show an upward trend for last month, which could, counter-intuitively, increase negativity due to fears of the US economy sliding into stagflation, rather than optimism from an upcoming Fed rate cut.
So, what can we expect today in the markets? I believe overall market activity will be subdued until the inflation numbers are released. However, in general, a positive trend will prevail, as investors are interested not only in the upcoming inflation reports, but also the final Fed monetary policy decision, which will be announced on September 17th and is expected to involve a rate cut.
On this wave, we can expect a turnaround lower for the dollar on the Forex market, followed by an increase in stock indices, which are already moving up in Asia and Europe. Cryptocurrencies and gold prices will also receive notable support.
Upon evaluating the overall market landscape, I find it to be largely positive.
Day's Forecast:
EUR/USD
The pair remains within the 1.1610–1.1735 range, from which it could break out to the upside on the back of the Fed's rate decision. A lack of strong inflation growth in the US may boost this upward momentum. On this wave, the pair may rise towards 1.1810. The level of 1.1744 can be used as an entry point for buying.
GOLD
Gold prices continue to rise after a brief consolidation and have already surpassed 3600.00. Dollar weakness amid the expected rate cut could push gold quotes up to 3650.00. The 3609.00 mark may serve as a buying level.
