The last two weeks of July saw markets pull back towards riskier assets, with the dollar retreating from multi-year highs against major currencies.
Over the past two weeks, signs of an economic slowdown in the US have strengthened market bets that the Fed will start cutting interest rates as early as the middle of next year, much sooner than previously thought.
Although US officials have not acknowledged the onset of a recession after two quarters of falling GDP, markets are largely indifferent to such formalities. They are more focused on data and economic forecasts.
Looking at the market dynamics, one can conclude that the markets consider the current pace of policy tightening to be too harsh for the economy. The US economy has lost 0.6% over the past two quarters, while Europe, which is suffering from an energy crisis, added 1.2% in the first half of the year.
US policymakers, including Powell and Yellen, note that the economy is actively creating jobs with historically very high employment levels. But we have to determine if these sightings are a relic this week.
From the next monthly employment report, markets expect employment to increase by 250,000, but at the same time wage growth will fall, which will only further widen the gap with inflation. During the week, market investors and traders will try to catch signals from indirect indicators such as the ISM industrial and service sector indices and the weekly unemployment claims.
How strong the labor market was in July could determine whether we see a minor corrective pullback in the dollar before further gains or a global reversal of the more than year-long trend towards a higher US dollar.
The FxPro AnalystTeam