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06/08/2024 - 07:00 UTCThe dollar continues its decline against most major currencies on Monday, with a mild recovery seen early on Tuesday. The dollar index (USDX) temporarily hit levels last seen in January at the 102.0 mark and then rose slightly to end the session 0.42% lower. A sharp appreciation of the yen to its highest level in seven months triggered a widespread weakening of the dollar. This was fueled by a series of economic reports released last week that suggested a looming U.S. economic contraction and the potential for more aggressive interest rate reductions by the Federal Reserve. The selling continued on Monday, with U.S. Treasury yields falling further.
CME FedWatch data strongly indicates a 50 basis point Federal Reserve rate cut in September, with an 72.5% probability. The market also expects another rate cut in November, with a 54.7% chance.
Recession concerns and a stronger yen sent the Japan 225 sharply lower on Monday, hitting levels last seen in October 2023, only to recover later to end session 0.90% lower. Recovery in Asian stocks continued strongly on Tuesday, as heavily underpriced stocks led to strong buying support from bargain hunters.
Energy markets experienced significant volatility on Monday, with both WTI and Brent crude plunging to multi-month lows before rebounding. The price recovery was fueled by escalating geopolitical tensions in the Middle East, coupled with unexpectedly strong U.S. service sector data and a supply disruption at Libya's Sharara oilfield.
Recession fears, reignited by disappointing jobs data, continued to weigh on major U.S. stock indexes on Monday. The US 500 declined by 0.9%, while the US 30 fell by 1.3%. The US tech 100 however, managed to recoup most of its losses and closed in positive territory. While the data did drive up hopes for more interest rate cuts by the Fed, it drained any appetite for risk-driven assets.
Market participants will be scrutinizing Federal Reserve commentary this week as expectations for substantial interest rate cuts mount. In the week ahead, the focus turns to jobless claims data from the US and unemployment rate from Canada.
Continuous pressure in the dollar from weak US economic readings drove the EUR/USD pair higher on Monday, temporarily hitting levels last seen in January.
The dollar is weakening as market participants increasingly anticipate steeper interest rate cuts as the current rate level is perceived as overly restrictive given the economic climate. The Federal Reserve is seen as having been overly cautious in its fight against inflation, maintaining rates for too long in July. Now, the focus has shifted to bolstering economic growth through more aggressive rate reductions.
Market participants will be watching closely on Federal Reserve commentary this week while some price action could also be observed upon the release of jobless claims data from the US.
Gold prices retreated from near-record peaks on Monday as a stock market recovery diminished safe-haven demand. However, underlying market uncertainty and a global equity sell-off kept bullion prices relatively elevated as investors sought refuge in safe-haven assets.
Growing expectations of a U.S. recession and potential interest rate cuts allow gold to retain most of its recent gains while pressuring the dollar.
Gold traders will likely keep a close eye on geopolitical tensions in the Middle East, fueled by the assassination of a Hamas leader in Tehran, which tend to increase safe-haven demand for gold.
Oil prices swung wildly on Monday, plummeting to their lowest levels in months before recovering. The price surge was ignited by mounting geopolitical tensions in the Middle East, combined with unexpectedly robust U.S. service sector data. Energy traders are now closely monitoring the potential for further escalation in the Middle East conflict.
Oil prices have been underpinned by concerns over a wider war following Iran and Hamas’ threats of retaliation for the killing of a Hamas leader in Tehran. The ongoing Israeli offensive against Hezbollah in Lebanon also contributes to the region's heightened tensions and supports oil prices.
The US 500 plummeted for yet another session on Monday, suffering losses of 0.9%. This extended last week's sell-off, fueled by growing recession fears. Apple's sharp decline, following news of a major investor reducing its stake, exacerbated the market's downturn. All three major indexes recorded their steepest three-day decline since June 2022.
Chicago Fed President Austan Goolsbee signaled on Monday a potential shift in monetary policy, indicating the central bank is ready to ease its stance if economic conditions deteriorate. While Goolsbee refrained from making specific commitments regarding a weakening labor market or manufacturing sector, he implied that maintaining a restrictive monetary policy in a softening economy might be counterproductive.
Investors are now waiting to see how the Fed will respond to the current economic situation and whether it can prevent a recession.
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