Investors Cautious as S&P 500 Inches Higher Ahead of Key Inflation Data | Daily Market Analysis

Key events:

• UK - Employment Change 3M/3M (MoM) (Jun)                
• UK - Unemployment Rate (Jun)
• USA - PPI (MoM) (Jul)
• USA - FOMC Member Bostic Speaks

The S&P 500 managed a slight gain on Monday as investors awaited crucial inflation data set to be released later this week.

The S&P 500 rose by 0.03%, while the Dow Jones Industrial Average dropped 140 points, or 0.3%, and the NASDAQ Composite increased by 0.2%.

Although the bulk of the earnings season has concluded, some key reports are still expected this week, with Home Depot (NYSE: HD) and Cisco Systems (NASDAQ: CSCO) among those set to announce their results.

According to FactSet, of the 91% of S&P 500 companies that have reported their Q2 earnings so far, around 78% have exceeded earnings per share (EPS) expectations, marking a generally positive earnings season.

Meanwhile, gold prices struggled to maintain momentum after a strong gain of more than 1% the previous day. Some intraday selling occurred near the monthly high during Tuesday's Asian session, likely due to repositioning ahead of the upcoming US inflation reports and a positive market sentiment that reduced demand for the safe-haven asset.

However, ongoing geopolitical tensions in the Middle East and concerns about a potential broader conflict in the region may temper market optimism. Additionally, dovish expectations regarding the Federal Reserve's policy, which have kept the US Dollar in check, could provide some support for gold prices.

The Japanese Yen continued its decline against the US Dollar on Tuesday, though the downside may be limited by safe-haven demand due to escalating geopolitical tensions in the Middle East.

Japan's parliament is set to hold a special session on August 23 to discuss the Bank of Japan's recent interest rate hike. The session, organized by the lower house financial affairs committee, is expected to include BoJ Governor Kazuo Ueda, according to sources cited by Reuters. Meanwhile, the USD/JPY pair found support as the pressure on the US Dollar eased, driven by reduced expectations for a 50 basis point rate cut by the US Federal Reserve in September.

The New Zealand Dollar strengthened on Tuesday, aided by a modest decline in the US Dollar. Last week’s stronger-than-expected New Zealand employment report has reduced the likelihood of a rate cut by the Reserve Bank of New Zealand on Wednesday, providing ongoing support for the Kiwi. Additionally, signs of improving Chinese demand, critical to New Zealand’s economy, could further bolster the NZD.

The RBNZ’s interest rate decision and subsequent press conference on Wednesday are anticipated to draw close attention, with potential hawkish signals from RBNZ Governor Adrian Orr likely to support the NZD against the USD in the short term.

The British Pound also saw some upward movement during Tuesday’s Asian session, reaching a new daily peak around the 1.2775-1.2780 region. However, the GBP/USD pair remains within the broader trading range of the previous day as traders await significant macroeconomic data from both the UK and the US before committing to new positions.

The release of the UK employment report and US PPI data later today, followed by UK and US consumer inflation figures on Wednesday and the Preliminary UK Q2 GDP on Thursday, will be crucial in shaping market sentiment towards the GBP/USD pair. Expectations that the Bank of England may lower borrowing costs two more times this year, following its first rate cut since 2020 on August 1, could continue to exert pressure on the GBP.

Meanwhile, the Australian Dollar extended its gains against the US Dollar on Tuesday, supported by positive domestic economic data. The AUD/USD pair is benefitting from hawkish sentiment surrounding the Reserve Bank of Australia.

Australia's Westpac Consumer Confidence index rebounded by 2.8% in August, recovering from a 1.1% decline in July. Additionally, the Wage Price Index remained stable with a 0.8% increase in the second quarter, slightly below market expectations of a 0.9% rise.

Investors are now turning their attention to the upcoming US Producer Price Index (PPI) data release on Tuesday and Consumer Price Index (CPI) figures on Wednesday, seeking confirmation of stable price growth in the US.