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.
