August’s US CPI rates and ECB’s interest rate decision

USD – August’s CPI rates in focus

With the US employment data still to be released as these lines are written we have a look at what may move the greenback next week. On a monetary level the market’s expectations for the Fed to tighten its monetary policy remain pivotal for the USD. In a latest turn of events Fed Board Governor Waller stated yesterday that he would favour the bank remaining on hold in the September meeting should US CPI rates continue to slow down easing the market’s hawkish expectations for the Fed.

It’s characteristic that currently Fed Fund Futures imply that the market marginally expects the bank to remain on hold in September and proceed with only rate hike, instead of two, until the end of the year. Hence we highlight the release of the US CPI rates for August, next Friday. A possible beyond market expectations acceleration of the rates could provide support for the USD, while on the flip side, possible slower than expected CPI rates could weigh on the USD as market expectations for the Fed to tighten its monetary policy could ease further.

GBP – UK’s July GDP rates eyed

We highlight in next week’s calendar the release of UK’s GDP rates for July for pound traders. A possible acceleration could lift the pound as it would imply a faster expansion of the UK economy and vice versa. On a monetary level, we note the high expectations of the market for BoE to keep rates unchanged on the 17th of September. Yet BoE’s chief economist, Huw Pill, seemed to be leaning on the hawkish side, when he was calling yesterday for a prompt rate hike to tackle the threats of inflation from rising energy prices. Further similar comments from other BoE policymakers could hawkishly shift market’s expectations for the BoE, if not for September , then for a later data and thus provide support for the pound. On a fiscal level, we express our worries for the UK national debt its attached servicing costs, given also BoE Governor Bailey’s warnings about them. The rise of UK bond yields could hinder the implementation of an expansionary fiscal policy UK PM Burnham may want to implement and thus could weigh on a fundamental level on the GBP.

JPY – BoJ’s intentions, a beacon for JPY

In a surprise move in the FX market, JPY strengthened across the board on Thursday’s Asian session. JPY’s strengthening seems to be linked to BoJ board member Takata’s hawkish comments. He stated that BoJ could conduct rate hikes in a nimble manner to fight inflationary pressures. The comment enhanced market expectations for the bank to hike rates in the September meeting and currently, JPY OIS imply a 75% probability for a 25 basis points interest rate increase and a 57% for another rate hike in the December meeting. Overall at the current stage BoJ’s intentions seem to be the main driver behind JPY’s direction, hence we note coming Thursday the speech of BoJ Policy Board member Kazuyki Masu in Fukui. Further hawkish comments could push JPY even higher and vice versa. As for financial releases, we note the release of Japan’s Overall Lab Cash Earnings and current account balance, both for July, yet regard the release of the revised GDP Rate for Q2 as a possible highlight for JPY traders. A possibly faster than expected expansion of the rate could provide some support for JPY and vice versa.

EUR – ECB in the epicenter of EUR traders’ attention

EUR traders in the coming week are expected to keep a close eye on the release of ECB’s interest rate decision. The bank is expected to deliver a 25 basis points rate hike and the market seems to have almost fully priced in such a scenario, according to EUR OIS. Yet the bank is also expected to hike rates again in the December meeting, which is a display of the market’s current hawkish inclination. Hence should the bank hike rates as expected, we may see the markets’ attention turning on the bank’s forward guidance. Should it be characterised by a hawkish nature, we may see the common currency getting some support as the markets’ expectations for a rate hike in the December meeting as well, could be enhanced. Conversely should the forward guidance fail to be adequately hawkish we may see the ERU slipping. Please be advised that the banks’ forward guidance is to include besides the accompanying statement also ECB President Lagarde’s press conference later on. The ECB President has been well known to be able to reverse the market reaction during her press conferences after the release of the interest rate decision, so we expect volatility for EUR pairs to be extended.

Also on a fundamental level, we note the elections in the state of Upper Saxony, Germany, this Sunday. The extreme right AfD party seems about to win the elections and EUR traders may wake up with a nasty surprise on Monday morning. Should the election results, increase political uncertainty in Germany and shock the markets we may see the EUR taking a dive.

AUD – Market sentiment to lead the Aussie

The Aussie’s amazing upward movement against the USD seems to be maintained, despite some hick-ups during the week. On a macro level he acceleration of Australia’s GDP rate for Q2 and the widening of the country’s trade surplus during July tends to be supportive for AUD. In the coming week not much is on the calendar, with maybe some interest gathering around the release of the Australia’s business conditions for August and consumer confidence for September, both on Tuesdays’ Asian session. Hence, in the coming week we expect fundamentals to lead the Aussie.

On a monetary level, the market’s expectations for RBA to hike rates at the end of September tend to be supportive for AUD. Also given that the Australian Dollar is considered a commodity currency and quite sensitive to the market mood a possible improvement of the market sentiment could provide some support for AUD, while a possibly risk averse approach by the market could weigh.

CAD – Fundamentals to drive Loonie

With the Canadian employment data due out as these lines are written, we note that in the coming week the calendar is rather empty from high impact financial releases from Canada. Hence, we expect fundamentals to lead the Loonie next week. On monetary level, we note BoC’s interest rate decision last Wednesday. The bank remained hawkishly on hold, as it expressed its worries for inflationary threats deriving from rising energy costs. The release tended to shift market expectations for BoC to the hawkish side and the bank is currently expected to hike rates in the December meeting, which tends to be supportive for the Loonie.

On a deeper fundamental level a risk off market sentiment tends to weigh on the Loonie given its commodity currency nature, while a substantial increase in oil prices could provide some support for the CAD, given that oil remains the main export product of Canada. The main fundamental issue though for Canada’s economy at the current stage remains the US-Canadian trade war. BoC expressed its worries for a possibly negative impact on Canada’s economic growth, and we expect that any further escalation of tensions with the US could weigh on the Loonie.

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