A fresh wave of sell-offs in the markets, accompanied by an increase in US Treasury yields and a strengthening of the US dollar, has become a reality. A combination of several negative factors could not be ignored by the market.

What is behind the market's decline?

The first reason to push markets down was the hawkish statement by Fed Chair Jerome Powell after last week's central bank meeting. In essence, the interest rate might be raised once more this year by 0.25%. However, the real concern wasn't just the potential hike, but the hint that high rates might persist until 2026. Not long ago, the market was hopeful that rates would begin to decrease gently next year, especially after the Federal Reserve achieves its 2% inflation target.

Another significant blow came on Monday when Moody's warned of a potential downgrade to the US government's rating if the chaos in the tax and fiscal policy domains doesn't cease. This warning was especially worrisome amid a looming government shutdown or cessation of funding due to the intensifying conflict between Democrats and Republicans ahead of the US presidential elections.

If these issues weren't alarming enough, Tuesday presented another cause for concern with the release of weak economic figures. Data showed a reduced growth in construction permits, with 1.541 million compared to 1.443 million and a forecast of 1.543 million. Moreover, the CB Consumer Confidence Index decreased to 103.0 in September, against an expected drop to 105.5 points, though it was revised upwards to 108.7 points for the previous period. On top of that, new home sales in August dropped to 675,000 compared to a forecast of 700,000 and a revised previous value of 739,000.

This data, combined with the looming shutdown threat and aggressive statements from the Federal Reserve, tested the resilience of market players. This resulted in reduced demand for risk assets, a fresh rise in Treasury yields, and a boost in the dollar's exchange rate.

Will the market sell-off and the dollar's rally continue?

The market downtrend may soon come to an end, and we might even witness a slight rebound in stock indices and a weakening of the dollar's value. This may happen amid profit-taking and closing of previously opened positions, rather than a shift in market sentiment. Significant changes might occur on Friday if the published data regarding the personal consumption expenditures index, figures on incomes and expenses, as well as the anticipated inflation and consumer sentiment values from the University of Michigan, indicate a decrease. This would signal a potential slowdown in US inflation.

In such a scenario, the closing of positions will come together with purchases of cheaper assets in anticipation of a new pause in rate hikes from the Federal Reserve. Naturally, under these conditions, the American currency is set to depreciate.

Daily forecast:

WTI crude oil

Oil prices are still ruled by the standoff between Russia and the consolidated West, as well as the strict policy of OPEC+. If the price remains above the $91.30 mark, a retest of the $93.50 level can be expected.

XAU/USD (Gold)

Gold is trading below the range of $1,900.00-$1,947.50, the channel it has been holding in since late August. If market sentiments improve, the dollar might come under pressure, allowing gold to return to this range and possibly even rise to the $1,913.75 level.