The main event for the week ahead is the U.S. inflation data on Tuesday, but there are several others that traders will also be watching. In the euroz
The main event for the week ahead is the U.S.
inflation data on Tuesday, but there are several others that traders will also
be watching.
In the eurozone, the
ZEW economic sentiment indicator will also land Tuesday, but this is not likely
to cause too much volatility in the FX market. It is worth watching, however,
as it shows how analysts and investors are seeing the future performance of the
German economy, one of the biggest and most important in the euro area.
On Wednesday, traders
will be watching the CPY y/y data for the U.K. and the PPI m/m for the U.S.
while Thursday we’ll have the employment change and the unemployment rate for
Australia and the core retail sales m/m and retail sales m/m for the U.S. The
BOE meeting is postponed due to the Queen’s funeral proceedings. On Friday
we’ll have the preliminary UoM Consumer Sentiment for the U.S. and the
Quadruple Witching might cause some volatility.
The UK CPI is
expected to run hot again with a consensus forecast of 10.2% and core CPI of
6.3%. If these figures come true, the market will expect a 50 bps rate hike
from the BOE at the next meeting.
According to CFTC and
Reuters data, speculators pushed the net long US Dollar bets to their largest
since early August. So it’s worth watching how the USD reacts this week.
The consensus for the
U.S. CPI this week is to print lower to 8.1% from 8.5% and the core inflation
to rise from 5.9% to 6.1%. Inflation data came below expectations in July due
to a drop in energy prices. Wells Fargo expects August to show a similar trend,
due to a 0.2% decline in overall prices — the largest since spring of 2020 —
coupled with a further decline in gasoline prices.
The inflation data is
very important as it can give us clues about the next FOMC decision at the
September meeting. The odds now seem to favour a 75 bps rate hike according to
WSJ. A print above expectations could open the path for more aggressive
reaction and vice versa.
In any case the CPI
alone will not be enough to convince the Fed that the inflation peaked and is
now on a downward trend. Other data like the PPI (Wednesday), the Sep (NY and
Philly Fed) manufacturing surveys and Aug Industrial Production data
(Thursday), the preliminary Sep U. Michigan Sentiment data are also expected
this week.
Last week the ECB
delivered a rate hike of 75 bps and left the door open for another 75 bps hike
for the next meeting in October.
The labour market
data for Australia still indicates a solid employment growth for the near
future, but a factor of concern is the labour force participation rate which,
if it declines, could be a sign that the labour market is tighter than
anticipated.
Another important
thing to watch this week is how the JPY will react after recent comments from
the BOJ and the Japanese Finance Ministry regarding the recent JPY aggressive
depreciation against the dollar. This has certainly caught the BoJ’s attention
and Japanese Vice-Minister of Finance Masato Kanda remarked that the JPY depreciation
has “come against the backdrop of
speculative moves and is clearly excessive”. He added that “the
authorities are ready to take the necessary steps without ruling out any
possible measure.”
Citi
analysts believe that FX interventions are likely to have a short-lived impact
and that they need to be coupled with changes in the monetary policy to be
effective. So far, the BOJ and Governor Kuroda have remained dovish and are
unlikely to be open to big changes in policy that they believe could negatively
impact the Japanese economy. A more dovish stance by the Fed might help curb
JPY depreciation against the dollar in the future, but this is not likely to
happen until U.S inflation data shows signs of cooling down. Also, we should
bear in mind that Governor Kuroda’s mandate is ending next year in April, so
major changes in policy are unlikely to happen until then. Opening the country
to foreign tourism might fuel retail demand for the Yen but will depend on
Japan’s Covid policy.
GBP/CHF expectations
Last week, Governor
Jordan said the SNB doesn’t rule anything out, but has no comment on currency
intervention to curb CHF appreciation. After the latest economic data, it looks
like the CHF still has room to further strengthen. The pair closed the week near
1.1100, the 2020 March low.
From a technical
point of view the pair still has room to depreciate on the H1 chart, but a
bullish divergence seems to be forming on MACD, which could suggest a bigger
correction until the 1.1215 level of resistance or even 1.12900 before resuming
the downward trend. Keep an eye on the U.K CPI which could be a risk for the
pair’s direction this week.
Another reason for
the GBP/CHF depreciation is that a more hawkish policy reaction from the SNB is
likely at the next meeting. After the BOE postponed its own meeting, the next
one will fall on the same day as the SNB press conference on Sept. 22nd. Until
then GBP/CHF still looks good for selling opportunities.
USD/CAD expectations
On the H1 chart,
USD/CAD looks good for selling opportunities. A correction is expected until
the 1.3080 level of resistance, but 1.3115 would be a more interesting area to
watch for. From there, the downtrend should resume targeting 1.2915. On the
upside, the next level of resistance is 1.3190.
The U.S. inflation
data could represent a risk for this trade so keep an eye on it.
From a fundamental
point of view the CAD is losing strength due to the weak jobs report for
August, with a higher-than-expected fall in jobs and unemployment rate. However,
the hourly wage growth rose. At the last meeting the BOC hiked interest rate by
75 bps, as expected, and as Senior Deputy Governor Rogers pointed out that the
bank was “a long way from where we need to be” on policy, even though
the economy was responding to higher interest rates but remained in a state of
excess demand.
This article was written by Gina
Constantin.
www.forexlive.com