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Caution ahead of central bank meetings, weaker PMIs

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By Craig Erlam  

Equity markets are treading water at the start of what is going to be a very lively week.

There are some huge central bank meetings this week, the most notable being the Federal Reserve on Wednesday. Interest rates are finally at or very close to their peaks and this week could see the Fed and ECB announce the last rate hike in their tightening cycles.

And a look at the PMI data may help to explain why, with economies around the world cooling at a decent rate. Inflation is also falling, primarily driven by favourable base effects at this stage, as well as falling energy prices and decelerating food costs.

The PMIs from the eurozone, the UK, and the US on Monday all told a pretty similar story. Manufacturing continues to struggle – although not as much as expected in the US – while services growth expectations are slowing. There are clear signs in the surveys of more cooling on the horizon, fewer inflationary pressures, and weaker hiring.

Central banks will be relieved, though certainly not enough to claim victory or explicitly declare the end of the tightening cycle. Policymakers will proceed with extreme caution, albeit very much buoyed by the data they’ve seen over the last month or two.

Oil testing 200DMA

Oil prices were trending higher again on Monday, building on the surge late last week and reaching their highest level in three months.

There have been a number of factors that have contributed to the gains recently, starting with the Saudi extension to its million barrel cut alongside Russia’s export reduction followed by data that could enable a soft landing in countries that are aggressively raising rates.

Not only has that taken Brent crude back above $80 a barrel, much to the relief of the Saudis, but it’s adding to those moves again.

It will be interesting to see how Brent responds around roughly $82.50-83.50 where it already saw some resistance on Monday. It may not have traded at these levels in almost three months, but it hasn’t significantly breached the 200-day simple moving average since last summer.

Gold pares gains

Gold appears to be pausing for breath ahead of the Fed meeting on Wednesday.

Economic data recently has given the yellow metal a big lift, with the price coming close to testing $2,000 last week. We’ve seen some profit-taking since then which has seen it pull back toward $1,960, but it’s hard to read too much into these moves.

Ultimately, the Fed will determine what happens next in gold.

Any strong signal on this being the final hike, or shock decision not to, could be bullish for gold and even see $2,000 put to the test.

A move above could be viewed to be very bullish, both from the psychological and technical perspective, with it being the 61.8% Fibonacci retracement of the May highs to June lows.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.