Following Powell’s speech on Monday, the Dollar began to strengthen, reversing its previous downward trend. Powell signaled that the Federal Reserve is planning two smaller rate cuts of 25 basis points each in November and December, which was less than the market’s earlier expectations of a total cut between 75 and 100 basis points by year-end. This more cautious approach from the Fed dampened enthusiasm in the markets, leading to a pullback in risky assets such as equities and cryptocurrencies. At the same time, commodities remained relatively strong, buoyed by rising geopolitical tensions between Iran and Israel, which added a layer of risk to the global outlook and further supported the Dollar.
The selling pressure on risky assets persisted into Tuesday as markets adjusted to the revised rate cut expectations. Meanwhile, the release of the JOLTS and ADP data earlier in the week signaled continued strength in the U.S. labor market, with both reports exceeding expectations. This, combined with stronger-than-expected PMI data, gave additional momentum to the Dollar, helping it break through the 102.2 resistance level. The labor market’s resilience provided further confirmation that the economy remains robust, which in turn reduced expectations for a more aggressive monetary easing cycle from the Federal Reserve.
As the week progressed, market participants turned their focus to Friday’s highly anticipated Non-farm Payroll (NFP) and Unemployment Rate data. Both figures came in stronger than expected, initially sparking a positive reaction across markets. Stock indices and cryptocurrencies opened with gains of 1-2%, and there was a brief surge in optimism as investors reassessed the outlook for future rate cuts. However, despite this initial rally, the enthusiasm quickly faded, and both equity and crypto markets gave up their early gains by the end of the day.
Commodities experienced a similar trajectory, selling off immediately after the release of the NFP and Unemployment data, but they managed to recover and rise by the weekly close. The stronger-than-expected labor data has led to a reassessment of the potential size of future Fed rate cuts, with markets now reducing expectations for a total 100 basis points cut over the next four meetings. This shift in sentiment has created a more cautious tone in the markets, as investors weigh the implications of a less accommodative Fed policy in the context of strong economic data and ongoing geopolitical risks.
In summary, while the initial reaction to the strong labor data was positive, markets remain in a state of flux, reflecting the evolving expectations surrounding Fed policy and the impact of external geopolitical events. As the week draws to a close, the outlook appears less optimistic, with both risky assets and commodities ending on a mixed note after a volatile few days of trading.
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