The American economy is currently in a situation that could be summed up as "good news, bad news." When the economic data looks good, it increases the chances of the Federal Reserve tightening its monetary policy. But, at the same time, this raises the risk of a recession. As the Fed continues with its annual $720 billion quantitative tightening program, US Treasury bond yields keep climbing, causing headaches for both the central bank and the government and heightening the potential for a political crisis.
Recently, after the Purchasing Managers' Index (PMI) data was issued, there was a notable shift in sentiment for the US dollar. PMI data holds significance for investors as it offers insights into businesses' expectations. A reading above 50 indicates expansion, while below 50 signifies contraction in economic activity. Now it hinted at a pause in the negative economic momentum resulting from high interest rates. The PMI data from S&P Global exceeded expectations, showing an increase to 51 points in October. This points to a slight expansion in US manufacturing and services for October, compared to the previous month.
Oil prices have been dropping as geopolitical risks in the Middle East have eased, reducing concerns about potential disruptions in the oil supply by OPEC. WTI crude oil prices found support at around $83 per barrel, effectively offsetting the previous increases driven by geopolitical instability. Now, attention is turning to data that could impact global demand forecasts.
Gold, typically seen as a low-yield investment, has experienced a surge due to the Middle East crisis, as investors seek a safe haven. Although gold had been in a downtrend recently, it's now stabilizing as buying pressure subsides, with sellers remaining cautious.
Major technology companies reported mixed financial results. Microsoft and Alphabet exceeded expectations, but Google's stock dropped by 6%, while Microsoft's rose by 4%. This led to a 0.3% dip in NASDAQ 100 futures.
The upcoming week promises a wealth of significant macroeconomic data. The US, Japanese, and UK central banks will conduct their monetary policy meetings. Additionally, investors are closely monitoring key US labor market data for October, scheduled for release on Friday. Keep a close eye on the events affecting the financial markets with the economic calendar.
In sum, market participants are looking for positive signals from Federal Reserve Chairman Powell regarding the dollar and the Fed's short-term monetary policy outlook. However, if Powell falls short of convincing the market about the Fed's unwavering commitment to a tight policy and merely maintains that the current policy settings will remain unchanged with no further interest rate hikes, the dollar could respond with a decline.
This article was written in cooperation with TradingView