FX.co ★ The Market Continues to Expect Fed Tightening Despite Weak Economic Data

The market is paying no attention to negative labor-market data or the continued slowdown in inflation in the United States. It is now "hoping" for the Personal Consumption Expenditures (PCE) Price Index report, believing that a rise in the index could become an argument in favor of an interest-rate hike in September.

Overall, an interesting situation has developed in the market, one that has occurred before in the history of the confrontation between market participants and the Fed. Large market players have been putting pressure on the regulator, urging it to take measures that would benefit them, while repeating the familiar claim that the central bank is losing credibility. For example, during the 2008–09 mortgage crisis, representatives of the financial markets persistently called on U.S. financial authorities to distribute "helicopter money" and implement quantitative easing, effectively flooding the U.S. economy with unbacked dollars. The financial authorities eventually gave in and accommodated these demands, while the U.S. financial system entered a prolonged decline whose effects are still being felt today.

Thus, we are currently witnessing something similar. Large market participants are attempting to influence the Federal Reserve. Perhaps we would not have seen such strong pressure if the Fed had, as before, begun providing signals about whether it intended to raise interest rates. However, Kevin Warsh does not want to do this, arguing that market participants should make their own assessments rather than rely on clear and explicit signals.

In fact, the current confrontation is creating market uncertainty, which is reflected in nervous reactions to the release of important U.S. economic data. The initial reaction is indeed appropriate—for example, to the extremely weak labor-market data, which was highly negative—but then the market returns to its previous behavior because the idea that interest rates must be raised while inflation remains above the 2% target once again takes hold.

What Can Be Expected in the Markets Today?

I believe that the absence of important economic data releases today will encourage sideways trading across all markets.

Daily Forecast:

GOLD

Gold found support at 4310.00. The price is recovering, which could lead to a limited rise toward the target level of 4427.94. The stop-loss level could be set at 4218.66. The 4363.80 level could serve as an entry point for a long position.

AUD/USD

The pair is trading above 0.7055. It could rise toward 0.7090. The stop-loss level could be set at 0.7041. The 0.7064 level could serve as an entry point for buying on a downward pullback.