Article by: ETO Markets
The foreign exchange market this week is mainly influenced by the US CPI data and the Federal Reserve policy expectations. Us inflation data showed that the headline CPI rose 2.9% in July from a year earlier, while the core CPI fell to 3.2%, further supporting expectations that the Federal Reserve may cut interest rates in September. The dollar has strengthened on the back of subdued inflation, especially after market expectations for a bigger rate cut fell, and its rebound has affected the performance of other currencies.
Heightened geopolitical risks and escalating tensions in the Middle East, especially the conflict between Israel and Hamas, have increased risk aversion in the market, with the dollar and gold supported by haven demand. The euro and the Australian dollar have come under pressure from both the strong US dollar and the weak local economy, with the Australian dollar particularly affected by the slowdown in the Chinese economy.
Overall, the dollar has strengthened this week on the back of subdued inflation and safe-haven demand, while other currencies have underperformed on weak economic data and geopolitical risks.
Gold prices (XAU/USD) were pressured by rising risk appetite, although geopolitical risks and expectations of a Fed rate cut provided some support. As fears of a recession in the United States eased and sentiment turned positive, global stock markets rose broadly and demand for safe-haven assets such as gold fell. However, the ongoing conflict in the Middle East and expectations that the Federal Reserve could start cutting interest rates in September have helped limit further declines in gold prices. The latest US economic data showed retail sales rose more than expected in July and the Labour market held up, further easing fears of a sharp economic slowdown. The series of data has led to a reduction in bets on a big Fed rate cut, with expectations leaning more towards a quarter-point cut at the September meeting. In addition, a recovery in US Treasury yields and a stronger dollar have weighed on gold prices. However, as geopolitical risks have not been completely eliminated, gold can still maintain its safe-haven demand to some extent.
From a technical point of view, the gold price trend is still in favor of the bulls. While gold has not been able to effectively break through the $… resistance level, technical indicators show that it remains in positive territory, indicating that the market still has upside potential. If follow-on buying is strong, gold could retest and break out of July's all-time high of $…-… and further break through the psychological $… level, confirming a month-long break from the wider trading range and setting the stage for further gains. On the other hand, if gold continues to retreat, the lower support is in the $…-… area, with further support around $… and the weekly low of $…. A break below the $… mark could further test the 50-day SMA support (around $…). If this support level is broken, gold could continue to retreat to the 100-day SMA (around $…) and late July lows (around $…).
The price of WTI crude oil is affected by multiple factors, showing a certain downward pressure. First, uncertainty over China's economic recovery continues to weigh on market sentiment, especially on the back of new loans falling to a 15-year low in July, reflecting weak domestic demand. The weak demand outlook from China, the world's largest importer of crude oil, has weighed on crude prices. In addition, OPEC and the IEA cut their forecasts for crude oil demand growth in 2024, adding to concerns about slowing global demand. On the other hand, ongoing geopolitical tensions in the Middle East, particularly Iran's preparations for possible retaliation for the attack on the Hamas leader in Tehran, have raised the risk of supply disruptions. That provided some support for oil prices, but so did expectations that the Fed was about to start a rate-cutting cycle. The dovish U.S. CPI data strengthened the likelihood of a Federal Reserve rate cut in September, which in turn raised expectations for economic activity and fuel consumption.
From a technical point of view, WTI crude is currently finding support around $…, having previously retreated from a three-week high of $…. In the short term, oil prices are likely to continue to fluctuate between $… and $…, with the market still waiting for further drivers. If oil can hold above $… and break resistance at $…, it could set the stage for further gains. However, uncertainty about global demand and the risk of an economic slowdown in China will continue to limit the upside for oil prices. On the downside, if oil breaks below the $… support level, it could test the $… level.
