Seven fundamentals for the week: Fed, NFP, geopolitics and lots of data promise an explosive week

• The Federal Reserve's announcement leads three top rate decisions including the BoE and BoJ.
• A stream of important US data releases culminates in Friday's Nonfarm Payrolls.
• Middle-East tensions serve as a wildcard in the hot summer.

Time for a summer holiday? Not yet, as this week promises to be super hot in financial markets. Three central bank decisions and US jobs data – which is growing in importance as inflation fades – provide a jam-packed schedule. Outside normal events, the Middle East is in the limelight once again. 

1) Israel-Lebanon border eyed after deadly weekend attack

A projectile left 12 Israeli civilians dead in a rocket that Lebanon's Hezbollah most probably shot. Fire between the Shiia militia and Israel has been within limits since the war broke out in October 2023, but this attack may spiral out of control.

The world is watching Israel's retaliation and what Hezbollah does afterward. The US, France, and other countries are trying to calm matters, and markets have already seen this movie before – tensions came and went. 

In case the escalation remains limited, investors will probably continue focusing on the global economy. However, there is always a risk that hostilities will significantly widen. In such a scenario, Gold, the US Dollar, and the Swiss Franc would benefit, while stocks would suffer.  

2) JOLTs job openings eyed by the Fed

Tuesday, 14:00 GMT. With inflation cooling, the Federal Reserve (Fed) and markets are putting more emphasis on the labor market—including this lagging but essential gauge. Another reason to watch it is that the central bank gives it importance.

JOLTs job openings bumped up in May to 8.14 million from 7.92 million in April, ending a streak of declines. Is hiring on the rise again? 
 

US JOLTs. Source: FXStreet

Apart from the headline, the level of quits is of interest. When people feel confident about their professional prospects, they leave their jobs more frequently, while a cool labor market means people stick to their positions.

3) BoJ hawks may return to their nests

Wednesday, during the Asian session. It's time to end the speculation—USD/JPY was down 1,000 at one point, mostly fueled by thoughts that the Bank of Japan (BoJ) would publish a hawkish view in its rate decision. The time has come, and I expect Governor Kazuo Ueda and his colleagues to stick to a more cautious approach.

While interest rates are 0% in Japan, inflation has been cooling, at least in the Tokyo capital region:

Tokyo Core CPI. Source: FXStreet.

Additional global disinflationary forces may eventually reach Japan's shores. Officials may settle for further unwinding of their bond-buying program rather than hints of rate hikes. 

The Japanese currency will suffer if this analysis is correct, sending all Yen crosses up.

4) ADP jobs may trigger contrarian opportunity

Wednesday, 12:15 GMT. America's largest payrolls provider has insights on the labor market – yet the figures it publishes do not always correlate with the official Nonfarm Payrolls. Nevertheless, the release moves markets. 

After ADP showed an increase of 150,000 jobs in June, the economic calendar points to an increase of 166,000 in July. That would continue painting a picture of a soft landing in which the economy gradually cools without suffering a recession.

A leap of 200,000 jobs or more would boost the US Dollar and hurt Gold, while figures around 100,000 or below would do the opposite. 

But there is a higher chance of a smaller surprise. Figures close to estimates would probably be short-lived, providing an opportunity to reverse the initial move. It is essential to note that the Fed announces its decision later in the day, keeping ranges tight. 

5) Fed's Powell expected to open wide door to cuts in September

Wednesday, 18:00 GMT, press conference at 18:30 GMT. Pre-cut decision? That is what markets expect from the Federal Reserve. US inflation has been cooling in the second quarter, giving the Fed more confidence to cut rates. While it will not happen now, Fed Chair Jerome Powell and his colleagues will likely signal a move in September is on the cards.

US core PCE inflation is almost at target:

Core PCE. Source: FXStreet

Markets are pricing two cuts in 2024, with the first coming in September. By merely not pushing back against such expectations, Powell would be giving his nod to such a move. The statement will likely consist of a small hint toward a cut. 

Beyond the next move, which is highly dependent on inflation, employment comments are highly important. Powell has been increasingly talking about "unexpected weakness" in the labor market as a reason to cut rates earlier. The more he mentions jobs in his press conference, the greater the expectations for more cuts this year. 

It is essential to note that the Fed does not provide new forecasts at this meeting, which means more emphasis on the bank's verbal communications. 

A solid tone on inflation would boost Gold and stocks and weigh on the US Dollar, while saying the bank needs more "confidence" on price rises would do the opposite. 

The optimal scenario for stocks regarding the labor market would be stability. Worries about hiring could cause some alarm in markets. Moreover, if the Fed eventually slashes rates due to rising unemployment, the US Dollar would rise on safe-haven flows. 

6) BoE may stage a "dovish cut" on Super Thursday

Thursday,11:00 GMT, press conference at 11:30 GMT. The rate cut is here – UK inflation is around 2%, the Bank of England's (BoE) target. And it is not too soon, as unemployment is off the lows, showing the economy is cooling.  

UK CPI. Source: FXStreet

However, members of the bank's Monetary Policy Committee (MPC) are independent, and they may surprise by leaving rates unchanged. In such a case, Sterling would soar. 

Assuming a cut to 5%, the MPC Meeting Minutes would come into play immediately. How many members voted for a cut? A vocal hawkish minority would amount to a "hawkish cut" – a signal that the next rate reductions are far from guaranteed. 

In addition, the BoE releases its quarterly Monetary Policy Report (MPR), which includes growth and inflation forecasts. An optimistic view of the economy would support Sterling, while a gloomy one would hit it. 

The BoE's decision is set to make waves beyond the Pound, shaking the Euro as well and keeping markets alert less than 24 hours after the Fed decision. 

7) Nonfarm Payrolls promise fireworks before the weekend

Friday, 12:30 GMT. Nonfarm Payrolls (NFP) have been sidelined in recent years by the Consumer Price Index (CPI) report as inflation took center stage. However, as inflation cools and the Fed talks about the labor market, the NFP once again gains ground as a top mover.

The Unemployment Rate has risen to 4.1%, but the US continues to gain jobs. After reporting 206,000 new positions in June, economists expect 185,000 in July. In the past few years, data defied expectations in most months. Will it happen again?

Apart from headline job gains, the jobless rate will be eyed, particularly if it rises from 4.1% and triggers the Sahm Rule. The indicator developed by renowned economist Claudia Sahm says that when the three-month moving average of the unemployment rate rises by 0.50% or more relative to the minimum of the three-month averages from the previous 12 months, a recession is imminent.

The Sahm Rule indicator stood at 0.43% in June, just below the 0.50% mark. 

Sahm Rule Recession Indicator. Source: FXStreet.

Wages are set to rise by 0.3% MoM in July, the same as in June. They are still important, but less so than before, as inflation is less important. 

Final Thoughts

The week when the page turns into August is super-busy – even without mentioning end-of-month flows – and price action could be erratic. Trade with care.