In recent weeks, traders have been thrown a few curveballs by the US political landscape, but one could say that financial markets are still holding up rather well, given the circumstances. Since July 13th, markets have absorbed news of an assassination attempt on Trump, the RNC convention, Biden dropping out and Harris being the presumptive nominee. While we did see some large moves on US indices last week, this was mostly a repositioning play ahead of anticipated lower interest rates, rather than in response to political events. Which indicates that the interest rate picture remains the prime driver of financial markets for now
But that is not to say that we won’t get a few more ‘political’ bumps in the road for financial markets between now and the November election. Particularly as we approach election day when things might become clearer as to who will sit in the Oval Office come January 2025. So, we might need to wait a little longer for the election to start causing a bigger stir in financial markets as investors assess how a change in the Presidency could impact the USD, inflation and in-turn the path of interest rates in 2025.
As for the here-and-now, this week US GDP and Core PCE Price Index data are the key events circled on the economic calendar. Both data sets are expected to nudge higher from their prior readings, and it will be to what extent they may exceed expectations which could swing market pricing regarding the amount of Fed rate cuts anticipated before year-end. The Core PCE data is the one that may most influence the tone of Fed officials at their next meeting (at the end of July). If we happen to see a particularly spicy looking Core PCE print, this could raise a few more questions over the timing of the first rate cut (markets have almost fully priced in a September rate cut at this point).
The gold market seems to be taking a breather this week in the lead-up to the Core PCE data, with some ongoing Dollar strength keeping a lid on the precious metal. Last week, gold enjoyed a record-setting week however things are more subdued with the spot price bouncing around both sides of the $2400 level. Resistance awaits at $2428, while support at $2382 recently prevented further moves to the downside. Overall, buyers remain keen on gold as evidenced by the shallow price dips, however a tame Core PCE Price Index reading might be required to accelerate moves to the upside (on rate cutting expectations).
The oil price has come under pressure on Gaza ceasefire talks, with risk-premium being effectively stripped from the price. Though if we don’t see any further progress on this front, a bounce remains possible. Aside from geopolitics, oil markets will likely remain sensitive to the interest rate outlook, with a looser monetary policy environment generally being conducive to gains in energy consumption.
In FX, the Dollar Index (DXY) has been making slow but steady forward progress courtesy of the greenback receiving safe-haven flows. Last week at this time, the DXY was languishing around the 103.65 mark however the index has now pushed to 104.45 (as of Asian trading hours on Wednesday). But it will likely be upcoming US GDP and Core PCE data which will be the biggest determinants of where the USD heads from here.
