By Lukman Otunuga, Senior Market Analyst at FXTM
Most Asian shares flashed red on Wednesday, with Chinese markets under renewed selling pressure after disappointing PMI data fuelled concerns over its weak economic recovery.
European futures are pointing to a negative open despite stocks closing higher in the previous session, as investors turn cautious ahead of the release of Fed minutes later in the day.
In the currency arena, the dollar seems to be drawing support from the risk-off sentiment, while the yen is hovering below the 145 level that triggered intervention by Japanese authorities last year.
Oil prices have edged higher after gaining more than 2% on Tuesday. This came after Saudi Arabia, and more surprisingly Russia, announced a rollover and new supply cuts into August.
Gold has enjoyed four consecutive days of mild gains with bugs eyeing up top tier US data in the days ahead.
Fed minutes and NFP
The second half of the trading week could be volatile for the US dollar thanks to the FOMC minutes Wednesday evening and the US jobs report on Friday. Investors will closely scrutinise these key risk events for clues on whether the Federal Reserve will hike rates more than once to tame still stubborn inflation.
In the June FOMC meeting, the Fed had delivered a hawkish “skip” when it held rates steady after ten straight rate hikes, but published its updated dot plot signalling two more rate rises in 2023.
However, there has been conflicting economic data since the meeting with depressing manufacturing survey numbers and more resilient labour market numbers further supporting expectations around more rate hikes.
Should the minutes strike a more dovish tone, this may weaken the dollar as expectations cool over the Fed pushing rates higher. However, if the minutes come across as more hawkish, the dollar could appreciate as bets rise over the Fed raising and keeping rates in restrictive territory for longer.
On Friday, the US non-farm payrolls report could rock markets if it beats market expectations like we have witnessed in recent months.
Markets expect the US economy to have created 225,000 jobs in June, with the unemployment rate forecast to fall to 3.6% compared to 3.7% in August.
Ultimately, another jobs report that surpasses consensus may reinforce expectations around the Fed raising interest rates two more times this year. Alternatively, a weak report could fuel speculation around the Fed pausing hikes down the road.
Gold on standby
Gold remains on standby mode ahead of the Fed minutes Wednesday evening and Friday’s US non-farm payrolls, which could offer fresh clues on the central bank’s policy path.
After shedding 2.5% in the second quarter of 2023, the precious metal remains under pressure with the scales of power slowly swinging in favour of the bears.
A hawkish set of Fed minutes and a robust US jobs report is likely to deal a heavy blow to the zero-yielding metal, sending prices back below $1900, with $1893 and $1858 acting as key levels of support. Should prices push back above $1932 with bulls gaining further support from a soft US jobs report, this could open the doors back toward $1959 and $1985, respectively.
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