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The Fed and ECB will continue to raise interest rates [Weekly Digest]

Wed, 08/02/2023 - 07:58

24.07.23 - 28.07.23

Results of the previous week

HO+6.51%

BABA +4.56%

HG+2.11%

WHEAT -8.70%

VIX -2.60%

NG -1.85%

Last week's biggest financial event was undoubtedly the US Federal Reserve's Federal Open Market Committee's (FOMC) meeting. Investors expected the US regulator to raise its key rate by 0.25 percentage points and signal that its rate hike cycle is nearing an end. That's pretty much what happened.

However, the official projections of the FOMC's voting members released later indicated that the Fed may ease its monetary policy more slowly than previously expected. Accordingly, we saw a tentative rise in stock indices and a general strengthening of the dollar in the foreign exchange market. The US Dollar Index (USDX) was trading 0.5% higher on Friday, 28 July, than before the meeting results were announced.

No less important was the meeting of the European Central Bank, the results of which were announced on 27 July. The European regulator noted that inflation continues to fall but emphasised the need to continue to combat it. In their statements, representatives indicated that future rate hikes would depend on incoming data, but the data are moving in such a way that a rate hike at upcoming meetings can't be ruled out. According to Bloomberg investors believe the rate could rise to around 3.8%. The euro strengthened on this statement.


Key events of the current week

Round-up of the Reserve Bank of Australia meeting
AUD/USD

DATE
01.08

GMT
04:30

FORECAST
4.35%

PREV.
4.1%

IMPORTANCE
High

Reserve Bank of Australia governors will meet on Tuesday, 1 August, to decide on its key rate. The consensus forecast based on the results of a poll by Bloomberg news agency suggests that the RBA will tighten its monetary policy with a 0.25% rate hike to 4.35%.However, the interest rate differential will continue to favor the US dollar, making the Aussie's upside attempt limited in scope..

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US manufacturing PMI
EUR/USD

DATE
01.08

GMT
14:00

FORECAST
48

PREV.
46

IMPORTANCE
High

This week is the first of the month, which means it'll be chock full of key macroeconomic statistics from the US, as well as news out of the Reserve Bank of Australia's meeting. The first report to be released will be the US manufacturing PMI data from the Institute for Supply Management. The index is expected to come in at 48, which would still signal that the manufacturing sector of the world's largest economy is in recession. At first glance, this may seem like bad news, but that's not really the case for the stock market. A downturn in industry is one reason for the Fed to consider easing its monetary policy, which is what investors are most concerned about right now.

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US labour market data
ES

DATE
04.08

GMT
12:30

FORECAST
190 000

PREV.
209 000

IMPORTANCE
High

Data on the change in the number of people employed in the US economy is always a key macroeconomic release. As usual, the report will be released on the first Friday of the month. This time around that falls on 4 August. The consensus forecast expects employment to increase by 190,000 and the unemployment rate to remain unchanged at 3.6%. These are good numbers that will suit one part of the Fed's dual mandate, which is to maximise employment and minimise inflation. Reactions to this release are hard to predict right now. On the one hand, these are strong numbers. On the other hand, it's a reason for the Fed to change its interest rate without looking back. In any case, this is still unlikely to reverse the long-term trend that's set in and is pushing the S&P 500 (ES) to around all-time highs near 4,800.

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