US stock indices traded mixed once again last week. Initial declines were driven by negative sentiment about agreements between the US and Iran. Indices subsequently rebounded, however, with the S&P 500 hitting a new high. This turnaround was fuelled by easing US inflation, which lowered the chances of the Federal Reserve tightening its monetary policy.
The forex market didn't see any clear trends either. The dollar weakened against the British pound and the Australian and Canadian dollars. The primary driver behind this was a shift in expectations for the Federal Reserve's monetary policy after data showed a decline in inflation for consumers and producers. Against this backdrop, the chances of the Fed hiking its key interest rate in September fell from 55% to 35%.
Brent crude prices rose to $90 per barrel at the start of the week before experiencing a downward correction, which had several reasons behind it. The EIA reported a sharp weekly increase of 17.4 million barrels in US commercial inventories, which brought the total to 424.4 million. That's the largest weekly rise since January 2023. On top of that, the market reacted negatively to downward revisions for Brent demand forecasts from both OPEC and the EIA.
Germany: ZEW Indicator of Economic Sentiment
The conflict in the Middle East has changed the global economy. The blockade of the Strait of Hormuz has led to shortages of energy resources and various other commodities. Rising prices are negatively affecting inflation expectations and contributing to an economic slowdown. In this context, an increasing number of German business community members are feeling pessimistic. Global analysts expect the ZEW Institute's Indicator of Economic Sentiment to continue to drop. The weak performance of key macroeconomic indicators is negatively affecting the euro. In this scenario, EUR/USD could decline to 1.1440.
UK: Inflation rate
Energy prices remain high as markets anticipate a de-escalation in the Middle East conflict and the reopening of the Strait of Hormuz. Persistent energy shortages are driving fuel prices higher in many countries, which inevitably affects the cost of other goods and services. In these conditions, it seems reasonable to expect rising inflationary pressure. Higher inflation, in turn, is fuelling expectations that the Bank of England will hike its key interest rate, which is good news for the pound. In this context, the GBP/USD pair could rise to 1.3630.
US: Federal Reserve meeting minutes
The US Federal Reserve kept interest rates unchanged at its July meeting. It's worth noting that inflation has declined slightly over the past two months, despite relatively high energy costs. This trend is deepening divisions within the Fed, particularly given recent weak labour market data. If the meeting minutes show a lack of hawkish rhetoric coming from the regulator, it would signal that interest rates will remain on hold for a while. That scenario is unfavourable for the dollar but good news for gold. In this context, XAU/USD could continue rising towards 4,440.00.