The markets are preparing for a relatively dynamic week, forecasted for volatility with a blend of macroeconomic data and structural shifts in the pricing of major currencies.
This week, the U.S. Federal Reserve and the European Central Bank (ECB) are at the centre of attention, with both poised to take key steps in monetary policy amidst a softening labour market and stubborn inflationary pressures.
From last week’s employment data report, we’ve seen how the U.S. added fewer jobs than expected in August, with payrolls increasing by just 142,000 compared to the anticipated 164,000.
Additionally, revisions to previous months’ data show a weakening trend, with July’s figures adjusted down from 114,000 to 89,000. This slowdown in job creation has led to rising speculation about how the Federal Reserve will respond.
Market expectations are leaning towards a 70% chance of a 25 basis point rate cut in the coming months. Historically, the Fed has acted cautiously in the face of inflation, and with the overall U.S. economy remaining relatively strong, the central bank has room to observe two more monthly jobs reports before deciding on further rate adjustments.
One key factor keeping inflation in check is the ongoing drop in gasoline prices, which have fallen to a six-month low. Weaker-than-expected demand and a subdued outlook for crude oil are contributing to these lower prices, which are expected to continue to act as a counterbalance to inflationary pressures.
In Europe, attention is focused on the ECB’s upcoming meeting. Markets are widely expecting the central bank to cut the main refinancing rate by 25 basis points, bringing it down to 3.65%. This move is largely driven by weaker wage growth and sluggish economic activity.
Further cuts are anticipated later in the year, with most economists expecting another rate reduction in December. However, speculation persists that the ECB could act even sooner, potentially in October, though policymakers have yet to endorse such consecutive cuts.
The ECB remains in a difficult position, as inflationary pressures and the broader economic slowdown make future policy decisions increasingly uncertain.
Looking at technical data , the U.S. Dollar Index (USDX) has shown mixed reactions following the weaker U.S. jobs data. Traders seem uncertain of its direction, with price action suggesting a possible move up towards 101.60 before correcting downwards and potentially breaking the 100.38 low.
EUR/USD is expected to consolidate before moving downwards, with a critical level at 1.1050 before a potential bounce to 1.1180.
We see GBP/USD trending downwards but is likely to see upward consolidation before another downward move. Traders should watch for bullish price action at 1.3030, which could signal a rally.
In the yen market, USD/JPY is waiting to break last month’s low. If that happens, attention will shift to the 141.00 level for bullish price action. Meanwhile, USD/CHF has made a new low at 0.83997 but may either continue downward or bounce back from here. A key level to watch is 0.8590 for upward movement.
Commodity markets also face key tests this week. Gold remains near its all-time high but may consolidate before moving further. A bearish signal around 2510 could lead to a test of 2460, where traders should watch for bullish price action.
Technically, we also see oil prices on the cusp of a decisive move. Despite moving sideways most of last week, USOil broke below 67.699, and the follow-up price action will be key to determine whether it’s poised to move up. If it closes above 70.518, it could confirm an upward trend. Natural gas prices are aiming for the 2.279 high, with 2.30 being a key level for confirmation.
This week, traders should prepare for fluctuations across several currency pairs as key economic reports are released and central banks take centre stage.
Starting on Tuesday, the UK will release its Claimant Count Change report, which is forecasted at 95.5K, down from the previous 135.0K. This metric, indicative of the health of the UK labour market, could be the push GBP/USD needs to rebound from recent lows.
Meanwhile, in Canada, Governor Tiff Macklem of the Bank of Canada is set to speak. His comments will offer clues on the country’s monetary policy stance, which could impact USDCAD. If Macklem hints at rate adjustments or concerns over inflation, the Canadian dollar may strengthen or weaken depending on his tone.
On Wednesday, attention shifts back to the UK as GDP data is released, with an expected 0.2% increase from the previous 0.0%. If the data aligns with expectations, it could signal that the UK economy is slowly gaining traction, leading to a potential lift in GBP-related trades.
Across the Atlantic, the U.S. will release its CPI figures, which are expected to show a slight reduction in inflation. Core CPI is forecasted to remain at 0.2%, while year-on-year CPI is expected to decrease from 2.9% to 2.6%.
This data is vital for traders of USD pairs, as it directly influences the Federal Reserve’s future interest rate decisions. If inflation fails to decline as projected, markets may anticipate a firmer stance from the Fed, possibly strengthening the dollar.
Thursday brings the highly anticipated European Central Bank rate decision. The ECB is expected to cut the Main Refinancing Rate to 3.65%, down from 4.25%, which could have a direct impact on the euro. A rate cut could weaken the EUR, as it signals the ECB’s attempt to stimulate economic growth amidst rising inflation concerns.
This move will be of particular interest to EUR/USD traders, as the pair could see volatility based on the central bank’s tone and actions.
Additionally, U.S. PPI data will be released on the same day, with a forecasted 0.2% rise. An increase in producer prices could signal ongoing inflation pressures in the U.S., which may strengthen the USD further as traders anticipate tighter monetary policy.
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