At the start of the week investors looked to readjust their portfolios after the strong US NFP report on Friday that sent the Dollar higher. The US currency remained well bid throughout the session yesterday as market participants are now betting on a more measured response from the Fed in regards to interest rate cuts. The Euro and the Pound traded sideways but the safe haven Yen and Franc gave up ground against the greenback. Equities closed in the red, Gold traded sideways and Oil attempted to move higher.
Just a day ahead of Jerome Powell’s testimony to Congress tomorrow, investors will remain focused on the key event for the week. It is obvious that Powell’s remarks will dictate how the Dollar and equities will trade going into the Fed decision at the end of the month and with little time between now and then the Fed Chairman has to say something to prepare the markets for whatever they may decide. The important question is whether the bullish NFP report was enough to keep the Fed at bay and delay easing for the time being.
Judging from what we’ve seen in the markets since Friday, investors are expecting a more moderate response from the US central bank but they’re not pricing out a rate cut at the end of the month. Granted, the labor market figures were surprisingly strong but unemployment ticked higher and wage growth slowed. More importantly, consumer confidence deteriorated recently, manufacturing and services activity remains subdued and inflation stays low.
Moreover, it would be unsettling for the Fed to have grown so bearish as they did during their last meeting - hinting on two rate cuts this year - and then do nothing now. As such, our central scenario calls for an “one and done” cut in July and, should this be the case, Powell would probably use his testimony to give market participants a heads-up to avoid a volatile reaction when they actually pull the trigger.
Meanwhile, Gold made a fresh attempt to climb above the $1,400 mark yesterday but the bullish bias supporting the Dollar was too much to overcome. The yellow metal has seen some weakness over the past few days with investors paring their bets on the Fed cutting rates aggressively while the strong NFPs also dampened demand. Right now, we’re in the midst of a consolidation phase for Gold and if Powell confirms that the Fed will cut rates in July then we may see a bump to the upside again. In the interim though and until we hear from him, prices look poised to continue moving lower towards the $1,385 area.
Finally, equities don’t seem to like the reduced odds of the Fed initiating a long-term easing exercise. With investors pricing in a lower likelihood of aggressive rate cuts, stocks are losing the support they enjoyed recently and both Europe and the US closed lower yesterday. This morning, futures on either side of the Atlantic are pointing to the downside and unless Powell sounds too dovish tomorrow more weakness could be expected.
MARKET EVENTS TO WATCH
- US NFIB Small Business Optimism - 2pm
- US JOLTS Job Openings - 6pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research