This week, the focus of the markets will be on the release of the U.S. inflation report. Market participants will closely monitor how much this important macroeconomic indicator may increase and how it could influence the Federal Reserve's decision on interest rates at its September meeting.
For now, the main factor influencing the market situation remains the tariff issue initiated by U.S. President Donald Trump. In addition, the upcoming changes in the Fed's monetary policy remain an important topic.
What awaits the markets amid the release of consumer inflation data?
Let's examine the pros and cons. Starting with the cons, the main negative factor directly affecting market dynamics is still the trade war between the U.S. and its trading partners. I have repeatedly emphasized this crucial factor in the past, one that has no precedent and therefore makes it difficult to assess its long-term implications fully. One thing is clear: supply chain disruptions and the influx of goods through black-market schemes — already operating widely in the U.S. despite Trump's aggressive tariff war — have driven up prices, especially for goods not produced domestically. This, in turn, supports price growth and increases consumer inflation, a key indicator of the national economy's health.
The second negative factor, as follows from the previous point, is inflation itself — in particular, consumer inflation — the report for which will be published tomorrow.
Higher inflation, under the Fed's traditional model, prevents the central bank from cutting interest rates, regardless of other economic problems. Back in the late 20th century, the Fed "suddenly" decided that the only acceptable level was consumer inflation at 2% or thereabouts. This model remains in place today, but there is a chance it may be abandoned — something the 47th president has repeatedly called for and is actively pushing toward.
These are the two main negative factors unsettling investors, as they create uncertainty about future developments.
Now for the pros. Paradoxically, in the medium term, U.S. tariff policy could have a positive impact on the U.S. stock market. The de facto "looting" of satellite countries such as Japan, South Korea, and the entire continental EU will contribute to capital inflows into the U.S., perceived as a safe haven, which will support demand for U.S. stocks. Another reason could be the Fed cutting interest rates starting in September — amid, on the one hand, a practically recessionary labor market, and on the other, Trump's pressure on the central bank with the prospect of replacing the uncooperative Jerome Powell with a more compliant figure. Notably, one significant replacement has already occurred: pro-Trump economist S. Miran replaced A. Kugler, who left her position on the Fed Board of Governors on August 8. Potential candidates to replace Powell are now under discussion.
All of this suggests that the Fed's model of tying inflation to the 2% mark could become a thing of the past. This would mean that rate cuts could indeed take place at the September meeting. Fed funds futures currently show such expectations at 88.4%, with an anticipated cut of 0.25%.
I believe rates could be cut by as much as 0.50% if the August jobs report once again shows critically low job creation and a rising unemployment rate. In this case, demand for stocks will continue to grow, and the three major U.S. stock indices will extend their upward trend.
In addition to these economic factors, a possible end to the war in Ukraine with the start of negotiations between Russia and the U.S. would provide another powerful boost to market optimism.
What can be expected in the markets today?
I believe stock indices, supported by the factors described above, may continue their upward trend. The cryptocurrency market may also rise, aided by a likely influx of dollar liquidity. The U.S. dollar will be under pressure but will generally hold near current levels on the Forex market against major currencies, as the tariff issue will also negatively affect the countries that these currencies belong to — Japan, the UK, the EU, and others.
Overall, I consider the market outlook to be moderately positive.
Daily forecast:
EUR/USD
Despite dollar weakness due to expectations of rate cuts, increased demand for dollar assets could lead to a decline in the pair. This could start locally after the release of the U.S. inflation report, which may show an increase. On this wave, the pair could resume its decline toward 1.1400. The 1.1625 mark could serve as a sell level.
Gold
Gold prices continue to consolidate in a sideways range but could also drop to 3284.45 if negotiations between Russia and the U.S. prove productive and open the way for further positive meetings between Trump and Putin. The 3355.00 mark could serve as a sell level.
