S&P 500, Gold, US Dollar, Powell, BOE, Japan Inflation, RBA Minutes

Global equity markets rose to a 14-month high while the US dollar fell to a one-month low on hopes that US interest rates are peaking and expectations of more stimulus from China.

The MSCI All Country World index rose 0.6%, the S&P 500 index jumped 2.6%, and the Nasdaq 100 index surged 3.8%. The German DAX 40 advanced 2.5% and the UK FTSE 100 rose 1.0%. In Asia, the Hang Seng index rose 3.3%, while Japan’s Nikkei 225 soared 4.5%. Risk-sensitive currencies, including the Australian dollar and the New Zealand dollar, rose 1.9% and 1.7% respectively over the week.

The US Federal Reserve kept interest rates unchanged on Wednesday but indicated that the hiking cycle is not over and that rates may need to rise by as much as 50 basis points on slower-than-expected moderation in inflation and resilience of the US economy. The market, however, doubts the Fed’s trajectory of interest rates, with pricing showing a less than 100% chance of one rate hike this year, with rate cuts starting as soon as next year.Markets will be looking for cues from Fed Chair Powell’s speech in the coming week for a justification of the dovish pricing.

Past week market performance

Source Data: Bloomberg; chart prepared in excel.

Note: Global Bonds proxy used is Bloomberg Global Aggregate Total Return Index UnhedgedUSD; Commodities proxy used is BBG Commodity Total Return; Hedge Funds proxy used is HFRX Global Hedge Fund Index.

Also, the European Central Bank raised interest rates to their highest level in more than two decades on Thursday and left the door open for more rate hikes on stubbornly high inflation. The ECB said it now expected inflation to stay above its 2% target all the way through to the end of 2025.

While other central banks are in hiking mode, China cut a few key policy rates in the past week, boosting hopes of more stimulus in coming months to support the fragile economic recovery. Data released earlier in the week showed China’s industrial output slowed more than expected in May, retail sales grew less than expected in May while fixed asset investment expanded less than expected in the first five months of 2023. Media reports suggest Beijing is considering issuing roughly one trillion yuan of special treasury bonds to help indebted local governments and boost business confidence.

The coming week brings a spate of Fed speeches, including Powell. US markets are shut on Monday due to the holiday. RBA minutes of the June meeting and US Fed’s Bullard speech are scheduled for Tuesday. Japan Reuters Tankan and BOJ monetary policy meeting minutes, UK CPI for May, and Canada retail sales for April are due on Wednesday. BOE interest rate decision, US Federal Reserve’s Goolsbee, Mester, and Powell speeches are due on Thursday. Japan inflation data for May, UK retail sales for May, and Federal Reserve’s Bullard and Bostic are due to speak on Friday.

Forecasts:

US Dollar Week Ahead: Bearish Bets Increase After Fed’s Hawkish Pause

The US dollar index’s (DXY index) fall below key support suggests the market seems to be at odds with the US Federal Reserve’s hawkish hold.

Euro Forecast: Bullish Breakout Signals Upward Price Trend Ahead for EUR/USD

Market skepticism over the Fed’s plans to resume tightening and expectations that the ECB will have to do more in the coming months to tame inflation could push EUR/USD higher in the near term.

British Pound Weekly Forecast: UK CPI Plus BOE Rate Call Add Up To More Gains

The British Pound has climbed to fourteen-month highs against the United States Dollar and the coming week’s economic events seem likely to see it make further gains yet.

Australian Dollar Outlook: A Sinking US Dollar Floats the AUD Boat

The Australian Dollar sprung higher last week as the US Dollar faced stiff headwinds and domestic data turned the July RBA meeting into a ‘live’ one. Will AUD/USD keep going?

S&P 500, Nasdaq Week Ahead: Hawkish Fed Speak Attempts to Cool Bull Run

Fed hawks warn of unsatisfactory measures of core inflation and further hikes. However, next week’s US data is light and unlikely to resist the bull trend. VIX lower.

Gold Weekly Forecast: Gold (XAU/USD) Bears Fail to Find Acceptance Below 100-Day MA, Where to Next?

Gold looks set to end a pivotal week with more questions than answers as market participants appear to be ignoring the Fed. Is a retest of $2000/oz on the cards?

— Article Body Written by Manish Jaradi, Strategist for DailyFX.com

— Individual Articles Composed by DailyFX Team Members

— Contact and follow Jaradi on Twitter: @JaradiManish