Trading in global stock markets on Thursday ended in negative territory. The issue of the Middle Eastern conflict, which has been lingering in anticipation of the Israeli army's military operation in the Gaza Strip, has not disappeared. On the contrary, its uncertainty dents sentiment among stock investors.
Of course, in this context, investors are unnerved. So, and any news, no matter negative or what can be called positive in this situation, makes an impact on their sentiment. When looking at the broader market picture, it remains negative. Main European and American stock indices are following a downtrend. Another factor to sustain selling pressure in stocks high yields of US Treasuries which have jumped to 10-year highs, which is not yet their limit.
The only assets which are staying near local peaks are crude oil and gold. Oil is rising in value due to the Middle Eastern conflict. With its probable escalation, the military conflict spreading across the broader Middle East might hinder oil supplies to the global market from this region and also from Iran. In turn, gold is supported by the traditional demand for the "yellow metal" as a safe-haven asset during geopolitical tensions.
Recently, other significant changes have occurred. For example, the Federal Reserve, as the leading global central bank, has revised its agenda for further raising interest rates.
What exactly has changed?
Earlier in the spring, Jerome Powell and his Federal Reserve colleagues had threatened two interest rate hikes by the end of this year. Then, the central bank was poised to maintain interest rates at these high levels for an extended period. However, reality brought the regulator back to square one. After a surge in the Consumer Price Index (CPI) in July, the Fed raised rates by 0.25%. Then, amid worsening labor market conditions, central bank's rhetoric began hinting at the need for a pause to observe progression in bringing inflation down. By November, Powell himself indicated that rates might not be raised any further.
Certainly, global central banks are watching the Federal Reserve's actions, aligning their monetary policies accordingly. This is why we haven't seen attempts by, for example, the European Central Bank, the Bank of England, or other regulators to change interest rate levels lately. This situation has led to a triangle pattern in the currency market, with USD-based pairs fluctuating frequently, indicating the absence of a clear-cut trend.
In this context, market participants attach gravity to the situation in the US labor market. It is, at the moment, a key barometer in the Fed's decision on interest rates. The inflation dynamic is certainly the second priority. And things are complicated here. The median value for the growth of new jobs remains below the key threshold of 200,000. We also note that the number of unemployment benefit claims has got stuck above this figure. The bottom line is that in such a scenario, the total number of jobs is regularly decreasing. This, in turn, will potentially weigh on the overall demand for goods and services in the US, pushing down inflationary pressures. This is why some Fed members, including Powell himself, have discussed the need for an extended pause in potential interest rate hikes.
For our part, over the past few months, we believe and stick to the opinion that the US regulator will no longer raise interest rates. Thus, if the situation in the Middle East begins to de-escalate, we can expect a gradual decrease in demand for the US dollar and gold as safe-haven assets. However, this will only happen in the event of a de-escalation. Unfortunately, in the near term, we should anticipate only an intensification of this crisis and all its consequences.
Intraday outlook
GBP/USD is trading in a wide range on the back of the two catalysts negating each other. On the one hand, geopolitical tensions are bullish for the US dollar. On the other hand, the prospects of the completion of the rate hike cycle by the Federal Reserve will be to blame for the US dollar's weakness in the medium term. I reckon that once GBP/USD surpasses the level of 1.2140, the price could climb to 1.2215.
EUR/USD
EUR/USD is also trading in a wide range. The euro could find support from rising demand for risky assets and the ECB's decision to keep interest rates at the current levels. If the instrument tops the level of 1.0570, it will be able to grow to 1.0640.