Three markets to watch next week: EURUSD, OIL, NASDAQ

Key takeaways

• A 60-day agreement has been signed between the United States and Iran.
• Negotiations on a permanent agreement have, however, been postponed to a later date.
• On Wednesday, we will see the financial results of the US memory industry giant, Micron Technology.
• We also have key readings of the PMI indices (Tuesday) and US PCE inflation (Thursday) coming up.

An incredibly intense week is heading towards the end. Markets clearly reacted to the Federal Reserve’s hawkish forecasts, the Bank of Japan’s rate hike, and the lack of changes from the BoE, RBA, or Norges Bank in light of reduced inflationary pressure following the signing of the agreement between Iran and the US. With geopolitical risk diminished, investors will focus more closely on data and other important geopolitical and market events.

The upcoming week will bring key macroeconomic data and earnings reports that will verify whether market optimism has a solid foundation. Investor attention will shift to the US PCE inflation reading and crucial publications from tech companies. Consequently, investors’ focus should be particularly directed at these three markets: EURUSD, OIL, and US100.

EURUSD

The main driving force for the US dollar next week will be the publications regarding US consumption and inflation, which could potentially solidify the hawkish rhetoric following the Federal Reserve’s latest decision. On Thursday, we will see the May report on personal income and outlays, containing the Core PCE index – still the Fed’s preferred measure of inflation. Earlier, on Monday, consumer confidence data for the Eurozone will be published, followed by preliminary PMI indices for major economies on Tuesday. Estimates indicate that Core PCE inflation rose by 0.35% month-on-month in May, which will push the annual figure up to 3.4% (from 3.3%). Meanwhile, headline PCE inflation, without any exclusions, is expected to accelerate to 4.1%. A higher inflation reading could strengthen the dollar once again and push the EURUSD pair toward local lows.

OIL (Brent Crude)

The black gold market is entering a cooling-off phase after several tense months of the ongoing war between the US and Iran. Although a 60-day memorandum has been signed, many issues remain unresolved, and negotiations for a permanent agreement have been postponed. The Strait of Hormuz has been reopened, but it is still far from fully operational, which could trigger further volatility in oil prices. With geopolitical risk removed from oil prices, the market will now shift to assessing demand fundamentals.

China has served as a buffer in the oil market, but aside from slowing imports, we are also observing other negative signals from the country. If the data does not improve, a strong supply recovery in the oil market could drive prices down to the $50 to $60 per barrel range next year. The International Energy Agency (IEA) indicates that we could experience an oversupply of up to 5 million barrels per day next year, driven primarily by an 8 million barrel per day increase in production.

US100 (Nasdaq 100 fut.)

For the tech sector, a crucial moment of fundamental verification is approaching, where market valuations built on the AI revolution will clash with hard financial data. On Wednesday, we will see the earnings release from the US memory giant, Micron Technology. The company is a direct beneficiary of the artificial intelligence boom, supplying key components for data centers. A positive surprise in earnings and guidance could provide the impulse for a dynamic return of the US100 index to the region of historic highs, cushioning potential hawkish pressure from Thursday’s PCE data.

Equity markets with a structure dominated by Big Tech currently show high resilience to the Fed’s restrictive monetary policy, as long as strong corporate earnings justify high valuations. The AI boom acts as a sort of safety buffer against an economic slowdown. Nevertheless, historically during periods of elevated valuation metrics such as the price-to-earnings (P/E) ratio, any signal of slowing order momentum in reports from companies like Micron, combined with a hawkish PCE inflation reading, could trigger sharp profit-taking, similar to what occurred following the recent NFP data release or during the latest Federal Reserve conference.

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