This past week saw Australia grappling with persistent inflation, as the Reserve Bank of Australia (RBA) maintained its cash rate at 4.35%. In the UK, there was a slight increase in GDP, indicating a modest recovery, while in the US, more evidence pointed to inflationary pressures, keeping the Federal Reserve on alert.

As we look ahead to the upcoming week, we will cover key economic events, including the USD ISM Manufacturing PMI, USD ISM Services PMI, USD Non-Farm Payrolls, Eurozone CPI YoY, and the UK’s General Election. Additionally, we’ll delve into a technical analysis of the Gold chart.

United States

USD ISM Manufacturing PMI – June 2024 Outlook

The ISM Manufacturing PMI is a crucial indicator of economic health, reflecting the activity levels in the manufacturing sector. The previous reading for May 2024 was 48.7, indicating contraction as it was below the 50.0 threshold. The forecast for June 2024 is slightly higher at 49.0, suggesting a potential improvement but still within contraction territory. This index is vital as it offers insights into business conditions and can be a leading indicator for inflation and GDP trends.

Market Forecast and Potential Reactions

The market expects the ISM Manufacturing PMI to rise marginally to 49.0. If the actual figure meets or exceeds this forecast, it could be seen as a sign that the manufacturing sector is stabilising, which may have several implications:

USD Reaction:

• Hawkish Scenario: If the PMI comes in higher than expected, it could bolster the USD. A stronger PMI would suggest resilience in the manufacturing sector, potentially delaying any rate cuts by the Federal Reserve. This scenario could lead to the USD appreciating as investors seek the higher returns associated with stronger economic performance and tighter monetary policy.
• Dovish Scenario: Conversely, if the PMI falls short of expectations, it might signal ongoing weakness in manufacturing, which could increase the likelihood of the Fed easing monetary policy sooner. This could lead to a depreciation of the USD as lower interest rates make USD-denominated assets less attractive.

Stock Market Reaction:

• Positive PMI: An improvement in the PMI towards or above 49.0 could boost investor confidence, potentially leading to a rally in the stock market. It would signal that economic conditions are improving, reducing fears of a prolonged economic slowdown.
• Negative PMI: A disappointing PMI could weigh on stocks, particularly in sectors closely tied to manufacturing. It would underscore concerns about economic health and could lead to increased market volatility.

Impact on Inflation and GDP:

• Higher PMI: A higher PMI indicates stronger production activity, which could lead to increased demand for raw materials and potentially higher prices, feeding into inflation. It also suggests that the manufacturing sector is contributing positively to GDP growth.
• Lower PMI: A lower PMI could imply reduced production activity, which might alleviate some inflationary pressures due to lower demand for inputs. However, it would also indicate a drag on GDP growth, reflecting broader economic weaknesses.

Overall, the ISM Manufacturing PMI is a critical data point for assessing the economic outlook. Investors and policymakers will closely watch this release to gauge the health of the manufacturing sector and its implications for broader economic trends, including inflation and GDP growth.

USD ISM Services NMI – June 2024 Outlook

The ISM Non-Manufacturing NMI, also known as the Services PMI, is a vital economic indicator that reflects the health of the services sector, which makes up a significant portion of the U.S. economy. The previous reading for May 2024 was 53.8, indicating expansion as it was above the 50.0 threshold. The forecast for June 2024 is slightly lower at 52.5, suggesting a modest slowdown but still indicating growth in the sector.

Market Forecast and Potential Reactions

The market expects the ISM Non-Manufacturing NMI to decline to 52.5. If the actual figure aligns with or deviates from this forecast, it could have several implications:

1. USD Reaction:
   • Hawkish Scenario: If the NMI exceeds expectations, it could bolster the USD. A stronger-than-expected NMI would indicate robust growth in the services sector, potentially reducing the need for the Federal Reserve to ease monetary policy. This scenario could lead to the USD appreciating as higher interest rates attract foreign investment.
   • Dovish Scenario: Conversely, if the NMI falls short of expectations, it might signal weakening in the services sector, which could increase the likelihood of the Fed considering rate cuts. This could lead to a depreciation of the USD as lower interest rates make USD-denominated assets less attractive.
2. Stock Market Reaction:
   • Positive NMI: An NMI reading above forecast could boost investor confidence, potentially leading to gains in the stock market. It would signal that economic conditions are improving in the services sector, reducing fears of an economic slowdown.
   • Negative NMI: A lower-than-expected NMI could weigh on stocks, particularly in sectors closely tied to services. It would underscore concerns about economic health and could lead to increased market volatility.
3. Impact on Inflation and GDP:
   • Higher NMI: A higher NMI indicates stronger activity in the services sector, which could lead to increased demand for goods and services, potentially driving up prices and contributing to inflation. It also suggests positive contributions to GDP growth.
   • Lower NMI: A lower NMI could imply reduced activity in the services sector, which might alleviate some inflationary pressures due to lower demand. However, it could also signal a drag on GDP growth, reflecting broader economic weaknesses.

Overall, the ISM Non-Manufacturing NMI is a critical data point for assessing the economic outlook. Investors and policymakers will closely watch this release to gauge the health of the services sector and its implications for broader economic trends, including inflation and GDP growth. The market will closely monitor the Fed’s language and forward guidance to gauge the future path of monetary policy. Investors should be prepared for potential volatility in the USD, as reflected in the DXY, depending on the nuances of the Fed’s assessment and projections.

USD Non-Farm Payrolls – June 2024 Outlook

The Non-Farm Payrolls (NFP) report is a crucial indicator of the health of the U.S. labour market and a significant driver of financial markets. The previous NFP reading for May 2024 showed a strong increase of 272,000 jobs, significantly surpassing expectations of 180,000. This robust job growth indicates a resilient labour market. For June 2024, the forecasted job growth is 180,000, suggesting a slowdown but still indicating healthy job creation.

Market Forecast and Potential Reactions

The market expects the NFP to add 180,000 jobs in June 2024. The actual figure, whether it meets, exceeds, or falls short of this forecast, will have substantial implications for the USD, stock market, inflation, and GDP:

1. USD Reaction:
   • Stronger-than-Expected NFP: If the NFP exceeds expectations, it could bolster the USD. A strong job report would suggest a robust economy, potentially delaying any rate cuts by the Federal Reserve. This scenario could lead to the USD appreciating as investors seek higher returns from USD-denominated assets​.
   • Weaker-than-Expected NFP: Conversely, if the NFP falls short of expectations, it might signal economic weakness, increasing the likelihood of the Fed considering rate cuts. This could lead to a depreciation of the USD as lower interest rates make USD-denominated assets less attractive.
2. Stock Market Reaction:
   • Positive NFP: An NFP reading above forecast could boost investor confidence, potentially leading to gains in the stock market. It would signal that economic conditions are improving, reducing fears of an economic slowdown.
   • Negative NFP: A lower-than-expected NFP could weigh on stocks, particularly in sectors closely tied to economic growth. It would underscore concerns about economic health and could lead to increased market volatility.
3. Impact on Inflation and GDP:
   • Higher NFP: A higher NFP indicates stronger job creation, which could lead to increased consumer spending, contributing to higher inflation. It also suggests positive contributions to GDP growth.
   • Lower NFP: A lower NFP could imply reduced consumer spending due to fewer jobs being created, potentially easing inflationary pressures but also indicating a drag on GDP growth.

Overall, the Non-Farm Payrolls report is a critical data point for assessing the economic outlook. Investors and policymakers will closely watch this release to gauge the health of the labour market and its implications for broader economic trends, including inflation and GDP growth.

Eurozone

Eurozone CPI (YoY) – June 2024 Outlook

The Eurozone Consumer Price Index (CPI) is a crucial measure of inflation, reflecting the annual change in the price of goods and services from the perspective of consumers. The previous CPI reading for May 2024 was 2.6%, above the European Central Bank’s (ECB) target of 2%, but showing signs of stabilisation. The forecast for June 2024 is slightly lower at 2.5%, suggesting a modest easing in inflation pressures​​.

Market Forecast and Potential Reactions

The market expects the Eurozone CPI to decrease slightly to 2.5%. Depending on the actual release, the market reactions can be significant:

1. EUR Reaction:
   • Higher-than-Expected CPI: If the CPI comes in higher than the forecast, it could bolster the euro. A stronger CPI reading would suggest that inflation remains a concern, potentially delaying any rate cuts by the ECB. This scenario could lead to an appreciation of the EUR as higher interest rates attract foreign investment​.
   • Lower-than-Expected CPI: Conversely, if the CPI falls below expectations, it might signal that inflation is cooling faster than anticipated. This could increase the likelihood of the ECB considering rate cuts sooner, leading to a depreciation of the EUR as lower interest rates reduce the attractiveness of euro-denominated assets.
2. Stock Market Reaction:
   • Positive CPI: A CPI reading above forecast might weigh on European stocks, particularly if it suggests that inflation remains stubbornly high. This could lead to concerns about tighter monetary policy and its impact on economic growth.
   • Negative CPI: A lower-than-expected CPI could boost stocks, as it might be seen as reducing the pressure on the ECB to maintain high interest rates, thereby supporting economic growth and corporate profits.
3. Impact on Inflation and GDP:
   • Higher CPI: A higher CPI indicates persistent inflation pressures, which might prompt the ECB to maintain or even increase interest rates. This could slow down consumer spending and economic growth, negatively impacting GDP.
   • Lower CPI: A lower CPI could signal easing inflation, potentially leading to more accommodative monetary policy. This could boost consumer spending and support GDP growth, though the overall economic environment remains fragile.

The Eurozone CPI is a critical lagging indicator for assessing inflation trends and the broader economic outlook. Investors and policymakers will closely watch this release to gauge the health of the Eurozone economy and its implications for future monetary policy decisions​.

United Kingdom

UK’s General Election: July 4, 2024 – Market Impact

The UK general election on July 4, 2024, was called unexpectedly by Prime Minister Rishi Sunak, marking a significant political event that could reshape the UK’s political landscape. This election comes amid improved economic forecasts and a notable reduction in inflation, which has eased from 3.2% to 2.3%​​.

Market Forecast and Potential Reactions

1. GBP Reaction:
   • Strong GBP: If the election results in a clear majority for either the Conservative or Labour party, it could reduce political uncertainty, potentially strengthening the GBP. A stable political environment is generally favourable for investor confidence, which could lead to increased demand for the pound.
   • Weak GBP: Conversely, a hung parliament or a prolonged period of political uncertainty could weaken the GBP. Investors tend to avoid uncertainty, which could lead to a sell-off in the pound as markets react to potential delays in policy implementation and economic reforms​​.
2. FTSE 100 Reaction:
   • Positive Market Reaction: Historically, the UK stock market tends to rally in the weeks leading up to an election, driven by speculative trading and hopes for favourable economic policies. A decisive election result could further boost the FTSE 100, as investors anticipate stable governance and clear economic direction.
   • Negative Market Reaction: If the election results are inconclusive or signal major policy shifts that could affect business operations, such as nationalisation plans under a Labour government, it could lead to increased volatility and a potential decline in stock prices. Specific sectors like utilities and rail, which may face nationalisation, could be particularly impacted​.
3. Impact on Inflation and GDP:
   • Economic Stability: A clear election outcome could support ongoing economic stability, contributing to steady inflation rates and GDP growth. Investors might view this as a continuation of current policies that have brought inflation closer to the target rate.
   • Economic Uncertainty: Prolonged political negotiations or a shift towards more radical economic policies could introduce uncertainty, potentially disrupting the economic recovery and impacting GDP growth. This could also lead to fluctuations in inflation expectations depending on the anticipated fiscal and monetary policies of the new government.

Overall, the upcoming UK general election is expected to introduce a period of heightened market volatility, with significant implications for the GBP and the FTSE 100. Investors and analysts will closely monitor the election results and subsequent policy announcements to gauge their impact on the broader economic landscape.

Chart of the week: Gold (XAU/USD)

Gold has been on a strong bull run since October 2022, driven by a combination of economic uncertainties and inflationary pressures, which have increased the demand for safe-haven assets. According to the Elliott Wave analysis depicted in the chart, this upward trend appears to have more room to run.

The current structure suggests that we are in wave 3 of a higher degree wave count, which is typically the most powerful and extended wave in Elliott Wave theory. Within this larger wave 3, we are currently experiencing subwave 4, a corrective phase that often precedes the final push of the impulse wave.

Should gold enter wave 5 of this higher degree wave 3, we can anticipate a significant price appreciation. The potential target for this upward movement is the 1.618% Fibonacci extension of wave 1, which sits comfortably around $2,541. This level is a common projection in Elliott Wave analysis, indicating a strong bullish momentum that could propel gold prices higher.

Traders and investors should watch for confirmation of wave 5’s initiation, such as a breakout above recent highs or supportive economic data that could drive further demand for gold. As always, managing risk and monitoring key support levels remain crucial, given the potential volatility in the markets.

Overall, the Elliott Wave analysis suggests that the gold bull run is far from over, with significant upside potential as we move into the latter stages of this impulsive wave structure.