Wall Street is closed today on the occasion of Labor Day. However, the main trend is unlikely to change significantly over the long weekend. The Nonfarm Payrolls report published on Friday revealed that the tight labor market loosened. It revived hopes for a soft landing.
However, the Fed needs to tame runaway inflation. It has repeatedly stated that it will stick to a hawkish stance even if the economy slows down. So, it will maintain aggressive tightening until inflation returns to the 2% target. For this reason, the odds of a 50 basis point rate increase are extremely low.
However, the CPI report is also due before the meeting. A positive NFP report would have hardly affected the Fed’s key rate decision. Yet, if there is a sharp drop in consumer prices, traders will have to decide whether to factor in a 50 or 75 basis point rate hike in September.
Meanwhile, the US dollar is trading steadily. It has already risen above 110, its highest level since June 2002, amid the worsening energy and geopolitical crisis in Europe.
Although last Friday the US currency fell below 108.30 after the release of the NFP report, it managed to recover and closed almost unchanged. The greenback grew by 0.6% over the week, scoring gains for the third week in a row.
The US dollar maintains its rally thanks to expectations of another aggressive rate increase by the Fed. Today, it advanced considerably as a safe-haven currency. In the Asian session, it was trading at 109.07, moving in the range of 109.80–110.27.
Following a rise in the US dollar, Asian currencies lost momentum. The yen was among them. Japan is now dealing with internal problems even though external headwinds are also intensifying. The country is worried about the seventh and probably most devastating coronavirus wave. High energy prices are boosting import prices. Apart from that, households and some businesses are bearing the brunt of a weak yen. The standard of living is constantly declining. The Services PMI Index has slid into contraction territory for the first time in 5 months. The figure decreased to 49.5f from 50.3. As a reminder, a reading below 50 indicates contraction, which is a negative sign for the economy.
As the outlook for the global economy is getting darker, some Japanese companies may face losses due to inflationary pressures in the near future. The yen was trading above the psychologically important level of 140 during the Asian session. Will the Bank of Japan or the Ministry of Finance intervene to support the yen? So far, they have made no statements on this issue. In the Asian session, the dollar/yen pair was trading at 140.52, hovering in the uptrend channel of 140.01-140.59.
The Australian economy seems more resilient than the Japanese one. The Services PMI Index amounts to 50.2. Inflation declined by 0.5% versus a 1.2% increase a month earlier. Traders are also looking forward to the RBA meeting scheduled for tomorrow. The regulator is widely expected to raise its interest rate by 50 basis points for the fourth time in a row to curb 2-decade high inflation.
Given the upbeat fundamental factors, the Aussie should have moved up. Commodity prices are also rising as well as oil ones. However, a rapid rally of the US dollar eclipsed these drivers. In addition, analysts are raising concerns about the prospects of China’s economy. China's southern tech hub, Shenzhen, imposed tough restrictions on Monday. The southwestern metropolis of Chengdu announced an extension of lockdown. This is why the AUD/USD pair is trading at 0.6783, moving in the bearish corridor of 0.6774-0.6838.
This week, several central banks, namely the RBA, Canada's central bank, and the ECB, will announce their key rate decisions. These events will be in the spotlight. Australia, Japan, and Canada are going to reveal their GDP figures. China is going to unveil inflation and trade surplus reports. Subscribe to InstaForex channel and have the latest market news at your fingertips! See you!
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