Rising Interest Rates and Central Bank Decisions Shape Investor Sentiment | Daily Market Analysis

Key events:                  

• Eurozone - ECB's De Guindos Speaks
• Eurozone - ECB's Panetta Speaks
• Eurozone - ECB's Elderson Speaks

Early last week, some investors briefly leaned toward the idea of a gentle market landing. However, by Friday, US stock markets had reversed course, closing the week with minimal changes. Investor apprehension is growing due to recent data indicating a potential increase in inflation and the possibility of a prolonged period of higher interest rates. This situation is particularly concerning for the S&P 500 Index, which has a significant concentration of Mega-Cap Tech stocks.

As interest rates rose, major Mega-Cap Tech firms, including Nvidia Corp. and Meta Platforms Inc., suffered substantial losses, exceeding 3.5%. This downward pressure from tech giants had adverse effects on the stock market, causing the S&P 500 to erase its earlier gains and the Nasdaq 100 to drop by nearly 2%.

The recent interest rate hike by the European Central Bank (ECB) was a significant move, but the accompanying signals from the central bank have indicated to the markets that this tightening cycle is nearing its conclusion. Consequently, the EUR/USD currency pair is expected to become more sensitive to fluctuations in the US dollar and US economic data.

In a separate development, media reports suggest that some members of the Bank of Japan (BoJ) have expressed reservations and pushed back against hawkish interpretations of comments made by Ueda earlier in the week. As a result, the USD/JPY exchange rate is heading toward 148.00.

Moreover, there is a growing sense of optimism among a subset of investors who believe that Beijing's recent efforts to stimulate the Chinese economy and stabilize financial markets will yield positive results. This optimism has a slightly positive impact on the Euro and could slow down the decline of the EUR/USD exchange rate.

However, the US dollar may maintain its strength leading up to and following the Federal Reserve meeting scheduled for this week. All eyes will be on the dot plot projections, and if the trend of rising inflation continues, as it has been, there is potential for upward revisions in the 2024 projections. This suggests that the US dollar is unlikely to weaken in the short term unless there is significant disappointment in US economic activity data that contradicts the Fed's expectations and indicates a slower economic recovery. In such a scenario, we might witness a weakening of the dollar's strength, but until then, it is expected to remain robust.

Gold is showing signs of recovery towards the end of the week, although it's rebounding from relatively low levels, having dipped as low as $1,900 on Thursday. The upcoming highlight for the yellow metal is undoubtedly the Federal Reserve meeting scheduled for next week. During this event, the Fed will not only announce its latest decision on interest rates but will also release new economic forecasts.

This upcoming week promises to be quite eventful, with a focus on several key central banks, notably the Federal Reserve and the Bank of England (BoE). Following closely behind are the Swiss National Bank (SNB) and the Bank of Japan (BoJ).

The week kicks off with the Federal Open Market Committee (FOMC) rate decision on Wednesday at 6 pm GMT. Economists and markets widely anticipate that the Fed will maintain the status quo regarding the current Fed Funds target range (5.25%-5.50%). The quarterly FOMC projections and the dot plot will accompany this meeting, drawing significant attention since the market is pricing in no change. Most market participants will closely scrutinize these projections. It's improbable that the Fed's dot plot will undergo significant changes during this meeting, suggesting that the Fed may still consider an additional rate hike for this year, particularly in light of recent inflation figures and the resilience of the US economy. Many observers believe this will be a 'hawkish hold,' leaving the possibility open for further policy tightening if deemed necessary. Additionally, it will be interesting to see how many rate cuts are projected for 2024 and the updated Fed forecasts for GDP and unemployment.

Thursday will feature the Swiss National Bank (SNB) and the Bank of England (BoE) announcements at 7:30 a.m. and 11:00 a.m. GMT, respectively. Both central banks are expected to implement a 25 basis point rate increase this week. If the BoE proceeds with another rate hike, the voting pattern will be closely observed and could be split. This might result in a temporary upswing in the GBP following the rate hike, but any potential gains are likely to be short-lived, particularly if there is less commitment from the Monetary Policy Committee (MPC) members in the vote.

In addition, ahead of the BoE rate decision, the UK will release the latest inflation figures for August. As of the current estimate, year-on-year headline inflation is expected to rise to 7.1% (up from 6.8%), while core inflation for the same period is projected to ease slightly to 6.8% (down from 6.9%).

Friday will bring the Bank of Japan (BoJ) policy decision at 3 a.m. GMT, which is expected to maintain the current rates. Consequently, significant market movement is unlikely in this regard. Additionally, we will see global manufacturing and services Purchasing Managers' Index (PMI) data for the eurozone, the UK, and the US on Friday. All these PMI readings, except for US services, are currently indicating contractionary conditions across the board and are expected to remain in such territory for the September release.