The U.S. economy continues to send mixed signals as it approaches a key juncture in its monetary policy.
This is the case despite the news leaning positive last week. Latest data from the Bureau of Economic Analysis has printed a positive revision of the GDP growth rate for Q2 2024, up to 3% from the initial 1.3%.
This came together with an unchanging Core Personal Consumption Expenditures (PCE) Price Index—the Federal Reserve’s preferred measure of inflation. Held steady at 2.6% year-on-year, this figure when accounted for month-on-month, prints at 0.2%, well within the regulator’s expectations.
This stability in inflation coupled with economic growth suggests that the Federal Reserve might lean towards a more conservative rate cut of 25 basis points, rather than the more aggressive 50 basis points.
That being said, the Fed will also have to account for the recent downward revision of job growth. With a reduction of over 818,000 positions, the revised jobs data last week has cast a shadow over the ostensibly strong economic indicators. Market commenters have raised concerns about potential inconsistencies in the data, particularly regarding how sustainable economic growth might be amidst these weakening employment numbers.
With the data being inconclusive, the market’s focus now shifts to the upcoming Non-Farm Employment and Unemployment Data, set for release later this week. These figures will be paramount in shaping expectations for the Federal Reserve’s next move.
Currently, the CME Group’s FedWatch tool indicates a 30% probability of a 50 basis point rate cut, a scenario that would likely materialise if payroll numbers fall below 100,000 and the unemployment rate ticks up to 4.4%.
In contrast, if the payroll numbers hover around 150,000 and unemployment remains stable at 4.3% or lower, a more modest 25 basis point cut will be a likely outcome.
On the technical front, key market indicators are pointing to potential consolidation and cautious movements in the near term. The USDX is showing little sign of consolidating at 101.50, with attention turning to price action at 101.80 or 102.00. Similarly, the EURUSD pair, currently trading lower, could see bearish action around 1.1110 or 1.1130 if it consolidates upwards.
Meanwhile, the GBPUSD is expected to consolidate before any significant price movements, with bearish action anticipated at 1.3180. The USDJPY, after trading up from 144.50, could test the 147.80 level next if it consolidates around 146.90.
Gold remains in a consolidatory phase, with traders advised to look for bearish action around 2510 or 2515, while Bitcoin continues its downward trajectory, potentially breaking a new weekly low if it breaches the 55962 level.
Natural Gas, on the other hand, is expected to test its low around 1.911 after consolidating at current levels
Looking ahead to events this week, the market will be closely monitoring several key economic events that could provide further clarity on the direction of U.S. monetary policy.
On Tuesday, attention will be on the ISM Manufacturing PMI data. Forecasted at 47.5, this figure is slightly above the previous 46.8, yet it remains in contraction territory. A reading below 50 typically signals a shrinking manufacturing sector, which could weigh on sentiment if the data comes in as expected. Market participants will be on the lookout for any surprises that might suggest a deeper contraction, which could reinforce the case for a more aggressive rate cut by the Federal Reserve.
Wednesday will see a trio of significant releases, starting with Australia’s GDP figures for the second quarter. The forecasted growth of 0.2% is modest, but any deviation from this could spark movement in the AUDUSD pair, especially if the data disappoints.
Later in the day, the Bank of Canada will announce its Overnight Rate decision, with markets expecting the rate to dip to 4.25%. However, any dovish hints could push USDCAD higher as traders adjust their positions.
The day will close with the U.S. JOLTS Jobs Opening report, where a decline from 8.18 million to 8.00 million is expected. This drop could strengthen the argument for a rate cut, particularly if the number falls below the forecast.
Thursday brings the ISM Services PMI, a key indicator of the health of the U.S. services sector. The forecast of 50.9, down from 51.4, suggests a potential slowdown. Should the actual figure fall below 50, signaling contraction, it could heighten fears of a broader economic downturn, potentially leading to more cautious trading as the week progresses.
The week will culminate on Friday with the highly anticipated Non-Farm Employment Change and Unemployment Rate data.
The market is bracing for a Non-Farm Employment Change of 164,000, a significant increase from the previous 114,000, and a slight dip in the unemployment rate to 4.2%.
These figures will likely set the tone for the Federal Reserve’s next move. We anticipate that a stronger-than-expected report could diminish the likelihood of a larger rate cut, while weaker data might push the Fed towards a more aggressive stance.
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