US stock indices posted moderate declines last week. Rising oil prices strengthened expectations that the Federal Reserve would raise its key rate at its September meeting, curbing risk appetite. The renewed rise in US Treasury (Treasuries) yields added further pressure on the indices.
The forex market saw mixed dynamics. The US dollar strengthened against a range of assets on expectations of a Fed rate rise, particularly against gold. However, EUR/USD’s gains were limited by the ECB’s decision to tighten monetary policy. The US dollar also appeared relatively weak against the yen amid expectations of an interest-rate increase by the Bank of Japan.
Brent crude prices reached $109.00 a barrel for the first time since May this year. Geopolitical tensions in the Middle East remain the key driver. Prices received additional support from data showing that OPEC’s output fell by around 640 thousand barrels per day in August, constraining global energy supplies.
Germany: ZEW Indicator of Economic Sentiment
Oil prices continue to rise amid tensions in the Middle East. Higher energy prices are intensifying inflationary pressures in the eurozone, prompting the ECB to raise its key rate. The regulator’s tighter policy is affecting business and consumer expectations. Analysts expect the ZEW Institute’s Indicator of Economic Sentiment to decline. Weak macroeconomic data are weighing on the euro, which could see EUR/USD continue to fall towards 1.1520.
US Federal Reserve interest rate decision
The US Federal Reserve kept interest rates unchanged at its July meeting. However, a fresh rise in energy prices is strengthening inflation expectations, while US inflation remains above the regulator’s target. As early as July, some Federal Reserve officials favoured a rate rise, while CME Group puts the current probability of an increase at 70%. Tighter monetary policy traditionally supports the US dollar and weighs on gold, so XAU/USD could continue moving towards 4280.00.
United Kingdom: Bank of England interest rate decision
Geopolitical tensions in the Middle East are keeping energy prices elevated, feeding through into the cost of goods and services and fuelling inflation. As a result, inflationary pressures in the United Kingdom remain above the Bank of England’s target. Although several major central banks have already begun raising rates, analysts expect the Bank of England to refrain from tightening monetary policy for now. The UK central bank’s more cautious stance is weighing on sterling, meaning GBP/USD could fall to 1.3400.