The economic information coming out of the United States in recent weeks shows some inconsistency that might not match the Federal Reserve’s preferences.
Following disappointing employment figures, retail sales showed a decline, reinforcing the perception that demand is losing its momentum.
This trend was further underscored by a decrease in consumer sentiment as indicated by the University of Michigan Consumer Sentiment Index, which fell from a previously recorded 55.2 to 51.0, moving to a different direction from the market consensus of 54.1.
The Federal Reserve is especially worried about the stagnation of inflation expectations, which have deviated from the targeted objectives.
Specifically, the one-year inflation expectation has increased from 4.2 percent to 4.3 percent, notably exceeding the Fed’s target of 3.4 percent established in February.
This situation suggests persistent inflation alongside deteriorating consumer confidence, providing the Federal Reserve with additional justification to adopt a cautious approach and maintain interest rates during its upcoming policy meeting scheduled for September.
The likelihood of the Federal Reserve refraining from adjusting rates has surged beyond 65 percent. Consequently, prior to the Federal Open Market Committee (FOMC) meeting on September 15-16, the following key economic indicators to be released will pertain to employment and inflation data for August. Notably, the recent inflation spike can be attributed to the escalation of tariffs impacting over 40 countries prior to the US-Iran conflict. Additionally, surging oil prices, aggravated by disruptions in maritime oil routes and ongoing Middle Eastern tensions, are preventing a reduction in inflation, particularly given the current impasse in US-Iran negotiations.
While Pakistan’s defence minister has indicated potential proximity to an agreement between these nations, the circumstances continue to be filled with unpredictability until a breakthrough is verified.
As long as hostilities persist between the two countries, it is indicative that negotiations remain stalled, leaving resolution at a considerable distance.
An important aspect requiring vigilance is the outcome of the US-Iran conflict and the consequential oil price dynamics, particularly whether oil prices stabilize or rise beyond the pivotal threshold of $90.
In the upcoming week, market participants will focus on the language articulated in the FOMC minutes, scheduled for release on Wednesday. Policymakers’ language is expected to reflect a balanced tone, given the recent economic reports that have led some officials with previously hawkish sentiments to reconsider their strategic approach in the coming policy session, as long as inflationary pressures do not escalate further.
Meanwhile, the USD/JPY exchange rate, which previously declined to around 155 from a peak of 164, has rebounded to 159.30 over the past fortnight. A primary concern among investors pertains to the effectiveness of the joint interventions by the Bank of Japan (BOJ) and the Federal Reserve to support the Japanese yen.
Questions linger whether this was a failed attempt at market stabilization or if the authorities are strategically positioning themselves.
The key psychological level around 160 remains significant. Should this level be breached, purchasing the yen may present a favourable opportunity, as intervention by the BOJ would necessitate support from the Fed.
On the other hand, if no intervention occurs and the price exceeds 160.50, the market may scrutinize the Japanese government’s commitment to defend its currency, potentially testing resistance levels at 162.50, and subsequently at 165.80.
The recent rise in oil prices adds to the complications by putting additional downward pressure on the yen while also intensifying inflationary conditions that worsen economic difficulties.
A critical hurdle for the yen is its markedly lower interest rate relative to the US dollar and other major currencies, which facilitates cost-effective borrowing by foreign entities seeking to acquire assets abroad offering higher returns. This trend has persisted for decades, largely attributable to the significant interest rate differential.
A historical perspective illustrates that following the events of September 11, the Federal Reserve dramatically reduced US interest rates from 6.5 percent in 2000 to 3.5 percent by August 2001, subsequently lowering them further to 1.75 percent by December 2001 and to 1 percent by June 2003, while simultaneously injecting substantial liquidity to bolster the markets.
From 2005, rates increased to 5.25 percent, subsequently declining again to 4.25 percent until 2008. However, from December 2008 to December 2015, the Fed maintained interest rates near zero, fluctuating between 0 percent and 0.25 percent.
While rates began to rise again in 2016 to reach 2.50 percent, they were sharply reduced to 0.25 percent in May 2020 due to the COVID-19 pandemic and have since increased to a range of 5.25–5.50 percent as of September 24.
Such historical shifts provide insight into market sentiment regarding the carry trade opportunities relative to the Japanese currency.
Lately, it has been noted that Japanese policymakers are divided over interest rate policy and are considering potential increases.
Meanwhile, gold prices have exhibited volatility as market participants await developments regarding US-Iran relations.
A weaker dollar and subdued US economic indicators remain supportive of gold prices. Currently, the yield on US 10-year treasuries hovers around 4.70 percent. If the current situation continues, fluctuations in gold prices are expected to depend on upcoming economic reports from the US.
Gold, having surged from a low of $4000, currently faces challenges in maintaining upward momentum, encountering significant resistance levels at $4468 and $4518.
Failing to exceed these thresholds could lead to a significant risk of a major market correction.
WEEKLY OUTLOOK - Aug 17-21
#GOLD @ $ 4376- If gold surpasses $4412, it will need to climb above $4445 to hit $4468 or higher. However, if it drops below $4335, it will put $4302 at risk, potentially heading toward $4265-70.
#EURO @ 1.1570- Euro has risen, and for it to see additional gains this week, it needs to decisively surpass 1.1648. If it doesn’t, a decline is likely. There is support at 1.1505, but a break below that level could lead to a drop to 1.1480.
#GBP @ 1.3533- Pound Sterling has risen and has solid resistance at 1.3585. A breakthrough here could drive it to 1.3610. On the other hand, key support lies at 1.3480, which is expected to hold firm.
#JPY @ 159.32- The $/JPY pair may encounters significant resistance at 160.25, with the potential for a breakout towards 161.75 or 162.20. On the other hand, the dollar finds support at 158.10. A breach of this level could lead to substantial losses, targeting 157.20 or even 154.50.
Copyright Business Recorder, 2026
The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper
He tweets @asadcmka