Markets Week Ahead: Euro, Dollar, Gold, S&P 500, Fed, Earnings, Inflation
Markets swung wildly last week as fears over the delta variant of covid bulged then faded. This initially caused a notable deterioration in risk appetite that steered stocks sharply lower. The Dow Jones, Nasdaq, and S&P 500 were down between -1.5% and -2.7% at their low points, but as sentiment recovered amid prevailing ‘buy-the-dip’ mentality, these major stock indices ended up finishing the week at record highs yet again.
Bonds behaved similarly with economic growth concerns initially sending Treasury yields on a steep descent that reversed as trading progressed. Likewise, crude oil prices dropped as much as -8.7% last week only to erase those losses and finish 0.7% higher on balance. This wave of volatility briefly fueled huge spikes in the VIX Index and OVX Index to hit nine-week and 13-month highs, respectively. The VIX Index and OVX Index closed lower on the week nevertheless as market angst subsided.
Although, the MOVE Index, which is a 30-day implied volatility reading derived from options on Treasury bonds, finished the week at its highest level since March. To that end, with bond market volatility expected to stay elevated, there is potential for other asset classes like stocks, commodities, and currencies to continue experiencing violent gyrations alongside yields. This seems quite reasonable – particularly when considering the plethora of high-impact risk events and data releases scheduled on the economic calendar for the week ahead.
MAJOR CURRENCIES AND GOLD PERFORMANCE AGAINST US DOLLAR
The Federal Reserve meeting on deck arguably stands out as the biggest catalyst for volatility due to its often market-moving potential. While the Fed announcement due Wednesday, 28 July at 18:00 GMT is widely expected to leave monetary policy unchanged, there is growing risk that the central bank tweaks language to its press statement. As such, traders will likely have a keen eye out for guidance on the FOMC’s substantial further progress objective and potential upcoming adjustments to the pace of asset purchases.
This brings US Dollar price action into focus as a barometer for gauging the market’s relative hawkish or dovish read on the Fed. US Dollar strength across the board of major currency pairs next week might indicate that the Fed is taking inflation and taper talks seriously. On the other hand, a weaker US Dollar post-Fed could indicate that the central bank is sticking to its transitory inflation narrative and staying cautiously accommodative. The latter scenario would likely correspond with positive boosts to risk assets and precious metals like gold and silver.
Traders will be watching for updated inflation data out of the US, Eurozone, Canada, and Australia on tap next week as well. Progress reports on economic recoveries across the US and Euro-area will also be provided with advanced Q2 GDP data slated for release. The Euro, in addition to the DAX 30, CAC 40, and STOXX 50, are all poised to digest this fresh information through the lens of how it might sway ECB policy given its latest strategy review and new perspective on inflation. Last but surely not least, US equity investors will be bombarded with quarterly results as earnings season kicks into full gear. What else is in store for markets in the week ahead?
Gold price action is primed for volatility next week with the Fed decision on deck. How real yields and the US Dollar react to fresh guidance from Fed officials will be key for gold outlook.
EUR/USD tumbled last week on the day of the ECB’s latest policy announcement, and that weakness is set to continue this week as a flood of major Eurozone economic statistics is released.
AUD/USD is likely to face increased volatility over the coming days as it faces a batch of key event risks going into the end of July.
Market uncertainty sees GBP pairs break out of their ranges.
Although the medium-term outlook remains negative, Bitcoin could make a bullish move in the coming days if prices manage to hold above key support in the $29,150/28,600 region.
US indices have a packed week ahead with earnings from the major technology names, US GDP data due and an FOMC rate decision. With so much on the docket the potential for volatility is heightened.
The US Dollar Index traded higher last week, sustaining its broader uptrend. Conflicting technical signals urge caution, but the directional bias remains skewed to the upside.
The Nasdaq 100 index is aiming to breach a key resistance level at 14,950 for a second time. A successful attempt may open the door to further gains, although the MACD indicator flags signs of weakness.
Gold hasn’t been very active the past few sessions, but that could change next week and provide a stronger trading bias.
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