In this blog, we delve into the recent market response to lower-than-expected inflation and its consequential influence on the search for risk assets. Additionally, we examine the impact of China’s growth figures and the measures undertaken by the government to stimulate the economy. Moreover, we provide a comprehensive analysis of the projections for gold and the Euro/Dollar pair, pinpointing potential points of support and resistance. Join us as we delve into these market movements and their potential implications on investment strategies.
Lower-than-Expected Inflation Spurs a Race for Risk Assets.
Currently, the focal point of market attention lies with inflation data, as investors eagerly anticipate signs of an end to the economic contraction cycle, marked by central banks raising interest rates to curb consumption.
In the preceding month, there was a glimmer of hope, but recent developments suggest a potential conclusion to this challenging period. The US Consumer Price Index (CPI) recorded a 0.2% increase in June, leading to a deceleration of the 12-month inflation rate from 4% to 3%. Although still exceeding the 2% target, the trend indicates a downward trajectory. In response, the market, seeking to pre-empt any shifts, initiated a surge in demand for risk assets, culminating in nearly a 5% rise in the American stock index within a week.
Despite the growing optimism, caution is advised, with some Federal Reserve members urging restraint in declaring premature victory. As we approach the forthcoming Federal Open Market Committee (FOMC) meeting on July 26, a final 0.25% interest rate hike is highly anticipated, with current expectations at 99.8%. Moreover, there is a 60% probability of the rate being maintained until year-end.
Reinvigorating Sentiment for the Week.
The week commenced on a somewhat somber note as China’s growth figures failed to meet expectations. The subdued economic activity in the Asian giant undoubtedly cast a shadow on global markets. Nonetheless, history reveals that Beijing has a commendable track record of stimulating its economy under such circumstances. Although these figures impacted iron ore and copper prices, they had minimal bearing on the earnings season for major American financial institutions such as Bank of America, Goldman Sachs, as well as prominent companies like Tesla, Netflix, and United Airlines.
Inflation data for the Eurozone aligned with projections, while the United Kingdom reported figures below anticipated levels. Despite standing at 7.9%, still notably high, this figure may temper Christine Lagarde’s assertive stance on interest rate hikes, as evident in her recent speeches.
In the realm of precious metals, the XAUUSD gold contract exhibits a pattern consistent with last week’s prognosis, thereby activating the pivot point at $1950 support. While an upward trend prevails, it is prudent to monitor the $2000 threshold, a psychologically significant level that could impact market sentiment.
In the currency arena, the EURUSD pair embarks on a corrective phase, potentially reaching the former support level at $1.107 without disrupting the upward trajectory. Such corrective movements are customary preludes to explosive rallies, with the target forecasted to reach the resistance level at $1.14.
The markets’ response to lower-than-expected inflation has ignited a heightened demand for risk assets, with investors eagerly observing the Federal Reserve’s forthcoming decisions. Despite mixed economic data from China and Europe, the sentiment remains cautiously optimistic. As we navigate these market movements, understanding the implications is essential in devising sound investment strategies.