Al-Watani: Slowing inflation in the US supports the Fed's move to hold interest rates steady

The National Bank of Kuwait’s weekly money markets report stated that global markets were influenced last week by easing inflationary pressures in the United States, continued economic growth resilience in the United Kingdom, and central banks’ cautious stance amid geopolitical uncertainty and rising energy prices.

The bank noted that while inflationary pressures appear to be receding across major economies, policymakers remain mindful of risks stemming from the Middle East conflict and its impact on energy costs.

In the United States, inflation slowed for the second consecutive month in July. The overall inflation rate, as measured by the Consumer Price Index, fell to 3.4% year-on-year, down from 3.5% in June, while the core inflation rate dropped to 2.5%. Producer price data indicated that inflationary pressures continued to ease, with the Producer Price Index remaining unchanged for the month, supported by a 3.1% decline in energy prices.

These developments bolstered expectations that the Federal Reserve would keep interest rates unchanged, given that current monetary policy levels appear sufficiently restrictive to push inflation lower over time.

At the same time, the U.S. labor market retained relative resilience despite signs of slowing hiring. Initial jobless claims rose slightly to 209,000, while the unemployment rate held steady at 4.1%. Although layoff rates remained low, companies have become more cautious in hiring due to higher borrowing costs and ongoing economic uncertainty.

The simultaneous easing of inflationary pressures and a slowdown in labor market momentum reduced expectations for near-term Fed rate hikes. Consequently, the U.S. Dollar Index fell toward 99.8, reflecting diminished expectations for further monetary tightening.

In the United Kingdom, the economy grew by 0.4% in the second quarter, in line with expectations, albeit slower than the 0.6% growth recorded in the previous quarter. Growth was supported by performance in the technology, advertising, and pharmaceutical sectors, alongside improved consumer activity driven by favorable weather and the FIFA World Cup. However, economists remain cautious, noting that much of the recent strength may be temporary.

Continued volatility in energy markets, fragile business confidence, and inflation concerns could weigh on future growth rates. In currency markets, the British pound traded against the U.S. dollar below 1.35, as investors balanced positive economic data against external risks.

In the Asia-Pacific region, the Reserve Bank of Australia kept its cash rate unchanged at 4.35%, following three rate hikes earlier this year. Despite acknowledging slowing economic growth and rising unemployment, the central bank maintained a hawkish tone, warning that inflation remains excessively high and could necessitate further monetary tightening if risks emerge that might cause it to rise again.

Reserve Bank of Australia Governor Michele Bullock reiterated that a further rate hike remains an option if inflation does not decline at the expected pace.

In commodity markets, prices continued to reverse the impact of geopolitical developments. Gold prices fell below $4,350 per ounce as the likelihood of a near-term Fed rate hike diminished.

Conversely, Brent crude oil prices rose to around $87 per barrel, supported by ongoing concerns about supply disruptions in the Middle East and uncertainty surrounding the reopening of the Strait of Hormuz.

Overall, the latest economic data suggest that major central banks are likely to maintain their cautious approach in the near term. Easing inflation in the U.S., stable growth in the U.K., and persistent inflation concerns in Australia all support a scenario where interest rates remain elevated for longer. Geopolitical developments and energy prices remain among the key risks influencing global market outlooks.