Fed and BoJ Rate Decisions Set to Shape Global Market Sentiment
The past week saw significant market movements as inflation concerns continued to rise globally. The European Central Bank (ECB) raised interest rates by 25 basis points, taking the deposit rate to 2.5%, in line with expectations. However, this move failed to boost the EUR/USD pair after stronger-than-expected US PPI inflation data was released on the same day.
US core CPI inflation also rose higher than expected at 0.3% MoM versus 0.2% anticipated, lifting Fed rate hike expectations from 70% prior to the data release to 90%. Oil prices surged above $100 a barrel as hostilities in the Middle East intensified, further driving up energy costs.
This week's major events will focus on interest rate decisions by two of the world's most influential central banks. The Federal Reserve (Fed) is set to announce its decision on Wednesday, with inflation running above the 2% target for nearly five years and rising due to the ongoing war in Iran. The Fed's preferred measure of inflation, the PCE price index, rose to 3.7%, while core inflation increased to 3.3% in July.
Market participants will closely watch how Federal Reserve Governor Kevin Warsh communicates his views on future interest rates, particularly whether this decision marks a one-time tightening or part of a longer cycle. A hawkish-sounding Fed could lead to higher US Treasury yields and pull gold lower, but if the central bank convinces markets that it is effectively controlling inflation, yields might decrease and support gold and stocks.