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Next week in the US:
NFIB Small Business Optimism (Tue.)
Fed Chair Powell Testifies (Tue. & Wed.)
CPI (Thu.)
Producer Price Index (Fri.)
Outside the US:
Japan Labor Cash Earnings (Mon.)
Mexico CPI (Tue.)
RBNZ rate decision (Wed.)
Russia CPI (Wed.)
Wall Street
When discussing the fundamental weaknesses of the US economy, it is not just about labor market data. While weaker data show that there were 1.2 available jobs for each unemployed person, which is much less than the peak of 2.0 in March 2022, and wage growth has slowed, both the manufacturing and services ISM indices also came in below expectations in June.
In addition, the published minutes from the June 11–12 FOMC meeting confirm that, despite decreasing inflation, it remains the primary concern for policymakers at the Federal Reserve. Participants noted that "further weakening of demand may now generate a larger unemployment response than in the recent past" and that "monetary policy should stand ready to respond to unexpected economic weakness."
Following last week's data, news, and minutes, CME Group's FedWatch tool shows a 72% chance for a 25bps rate cut, significantly higher than the 50% probability of the previous week.
The week ahead will be mostly focused on Fed speakers and inflation numbers. The Consumer Price Index (CPI) will be published on Thursday and the Producer Price Index (PPI) on Friday.
In the May reports, both the CPI and PCE price indexes showed that inflation is subsiding after flaring up in the first quarter. Headline CPI was unchanged in May for the first time since July 2022. Excluding volatile energy and food prices, the core CPI increased by only 0.2%, the smallest increase since August 2021. For June, as energy prices have increased again, we expect the headline inflation number to inch higher by 0.1%, but annual inflation may fall to 3.1% from 3.3% in May. On the other hand, Core CPI is expected to increase to 3.5% on an annual scale, with a 0.2% monthly rise.
While CPI numbers show the current inflation condition, the PPI will indicate future inflation trends and expectations. The Producer Price Index (PPI) declined by 0.2% in May. We anticipate the PPI final demand index to rise by 0.1% on a monthly scale and by 2.3% annually. The core PPI is also expected to increase by 0.1% monthly and by 2.4% annually.
If the final data confirms market expectations, it would support the Fed speakers and Minutes' assertion that there is still a long way to go to fully control inflation. After the anticipated 25 bps cut in September, the next cut in 2024 will remain in question and will require more confirmation from inflation and labor market data.
On the market reaction front, while all major indexes closed higher last week, fundamental data are risky and can increase doubt among investors. This means we need to be more careful about our positions and avoid falling into market traps.
On the charts, while we can see new higher highs, the on-balance volume (OBV) shows lower highs, and the Relative Strength Index (RSI) is in the overbought area around 76, signaling a possible reversal. The first support sits at 5,220, and then the second support (S2) sits at 5,440. Breaching below S2 could change the trend and result in a lower close for the week; otherwise, bulls will still be able to lead the market.
Forex Market
Despite some weakness after Friday's labor data, we expect the US dollar to maintain its strength over other currencies as the frequency and significance of US events and financial data releases increase in the week ahead. However, some currencies are expected to chart their own course at certain points during the week, such as the Kiwi, with the RBNZ interest rate decision meeting.
USD
The US dollar closed the week lower, and we are now awaiting US inflation numbers and Fed Chairman Powell’s testimony before Congress. So far, published data show weakening economic activity.
Both the ISM manufacturing and nonmanufacturing PMIs indicate a contraction in economic activities, while the labor market also seems to be easing. How Mr. Powell presents these data before Congress will be very important. US inflation numbers for the last month (will they be revised lower or higher?) and June will also be crucial. While decreasing inflation can further pressure the US dollar, a possible failure of the rates to slow down may imply more persistent inflationary pressures in the US economy, potentially hardening the Fed’s stance to keep rates high for longer.
On the macroeconomic front and political events, after the weak performance of US President Biden in the debate, we are now waiting to see what the Blue Party will decide about their nominations.
As time passes, the perception that US President Biden may be too weak to win against Trump seems to be gaining ground among Democrats, increasing the chances of changing the nomination, which could negatively affect the US dollar.
From a technical point of view, the DXY returned to a bearish trend, with 104.70 as a key support and 104 as the key pivot point. Falling below 104 could change the trend, although this seems less likely now. For the week ahead, we can expect the USD to move around the 104.70 area, with some fluctuations slightly higher or lower.
JPY
The JPY remained relatively unchanged against the USD, with the USD/JPY ending the week almost at the same level it started. It is important to note that the USD lost value last week, but given the BoJ’s loose monetary policy and the significant interest rate spread between the Fed and BoJ, the Japanese Yen remains in a weaker position.
On the economic data front, Japan's Q2 Tankan survey kept a positive outlook for the Japanese economy. The large manufacturers' index rose two points to +13, the large non-manufacturers index eased one point to +33, and capital spending plans for Japanese enterprises also firmed. However, economic figures remain mixed, including a large decline in Q1 GDP, suggesting that the Bank of Japan may wait until October before hiking its policy rate further.
As long as the JPY continues to weaken, the chances of the Japanese government intervening in the FX markets to support the Yen increase. However, Mr. Suzuki refrained from issuing a warning about a possible market intervention in his comments last week. Additionally, if global geopolitical tensions rise, the JPY’s ability to attract safe-haven inflows could come into play and boost its demand.
From a technical point of view, USD/JPY returned to a bearish trend with 160 as its key pivot. Falling below this level will open the doors for the next support at 158 and then 155.50. Lower levels will require more attention from the BoJ and Japanese government policies.
Gold
As the US dollar weakens and US bond yields are lower than at the beginning of the previous week, the demand for shiny metals can increase. For the gold market, the overall condition remains the same.
Doubts about future rises in the stock markets, lowering yields, increasing geopolitical tensions, and more buying from central banks, such as China's PBoC, are encouraging the yellow metal's prices.
In the futures market, for comparison, total speculative gold-futures buying in March, April, and May ran at gold-equivalent levels of +186.6t, +28.5t, and +104.0t, respectively. June’s meager buying was a sharp slowdown from the preceding months, yet gold defiantly continued consolidating high. Additionally, after 18 consecutive months of reporting increased gold reserves, China’s central bank declared it hadn’t done any buying in May.
While these data and numbers explain the reason for weaker movement in June compared to previous months, we should note that traditionally, summer is not a favorable period for gold investors.
From a technical point of view, despite the weaker movements in May and June, XAU/USD did not fall below its 38.2% Fibonacci level, which strongly supports its current bull run. The next target for gold is sitting at its all-time high above $2,450.
Oil
It is going to be an important week for the energy market, with the EIA Short-Term Energy Outlook on Tuesday, the OPEC Monthly Report on Wednesday, and the IEA Monthly Report on Thursday. Additionally, as always, we will have the API and EIA weekly reports.
Despite rising US production remaining at 13.2 million bpd for the past nine months, crude oil inventories in US commercial storage fell by 12.2 million barrels last week, marking the sharpest decline since last July. This contradicted the expected 0.4 million decline, prompting impulse buying in oil.
Higher demand with the start of the US driving season increases demand potential, which was the main reason for the rising price towards $83.40. With the current demand outlook, $85 also seems likely to be reached. We should not forget that a cheaper US dollar can also increase oil prices.
Monthly reports from OPEC, EIA, and IEA in the week ahead will give us a better perspective on market demand and supply and help us understand price movements better.
On the technical front, the Fibonacci extension levels show $82 as the 61.8% key level. Holding above that can put the previous week's high at $84.67 as the next resistance, with $89 as the long-run target.
Bitcoin
Several factors have put pressure on the price of Bitcoin. Mt. Gox creditor payouts triggered investor panic, adding to the fear sentiment that selling by the US government and potentially German institutions had created. These factors, along with other market reactions, have caused more than a 22% loss in the BTC price over the past month.
With Bitcoin now trading near its yearly lows, all eyes will be on US markets reopening next week to see the effect on demand for Bitcoin ETFs and their behavior, which can determine the direction of the cryptocurrency market. In the coming months, while the possible period of seasonal selling activity can pressure prices, the Fed's scaling back of its rate cut forecast and the high operational costs faced by Bitcoin miners post-halving are also contributing factors to the overall downward pressure.
From a technical point of view, stable trading under $57,000 will put the next significant support around $50,400 on the radar. Should Bitcoin close below this level on the weekly chart, the price could drop further to $43,900, aligning with the Fib 0.382 level of the long-term uptrend. Additionally, the EMA values on the weekly chart indicate a continued negative trend, suggesting the decline may persist.
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