GemForex - weekly analysis

The coming week was heralded on Friday by Fed Chairman Jerome Powell, who, as expected, struck a hawkish tone in his speech. He addressed the misalignment of demand and supply factors and the steps needed (rate hikes) to correct the current situation of high demand and low supply. Powell emphasized the Fed's mandate to maintain price stability by vigorously using its tools to suppress inflationary pressures before they become entrenched.

As for Europe, the ECB now faces a more difficult task as divergence among central banks seems to be increasing again. The ECB's task is far trickier than that of the U.S.: it must juggle multiple nations under deteriorating fundamentals and is likely to keep the euro under pressure through 2022.

In the run-up to Jackson Hole, there was nothing of significance in last week's ECB minutes, but there was mention of concerns about the euro. Recent euro weakness will obviously add to inflationary pressures and trying to find a floor for the euro will prove difficult given the gloomy economic outlook for the eurozone.

There are some notable events coming up in the week ahead, but from an EU perspective, core inflation will be of great importance to euro experts. Core inflation is expected to be 4.1% and could increase pressure on the ECB to continue its rate hike cycle. Further rate hikes after September could be risky as the winter months will likely continue to weigh on the energy complex (higher prices) and given the talk of recession (albeit downplayed by the ECB), higher rates simply don't make sense.

On Tuesday, metals will be in the spotlight, and EUR will be in focus when the preliminary German inflation report (HICP) for August is released at 15 GMT+3. Gold in USD terms will also be in the spotlight at 17 GMT+3 when the US Conference Board consumer confidence report for August is released.

On Wednesday, CNH is likely to prove volatile when the NBA manufacturing purchasing managers' index for China for August is released at 04:00 GMT+3. 

EUR will also be back in focus when the French preliminary inflation report (HICP) for August is released, followed by the German unemployment rate and change for August, the Italian preliminary inflation report (HICP) for August, and the flash inflation report (HICP) for August for the eurozone. Also, CAD will attract attention when the Canadian Q2 GDP report is released.

On Thursday and Friday, all eyes turn to August‘s ISM Manufacturing Index, Initial Jobless Claims, and US non-farm payrolls report on Friday. Signs that the labor market in the world’s largest economy remains tight may underpin Fed tightening bets, risking market volatility.

From the other side of the Atlantic, the conditions are getting urgent. News that millions of households and businesses will face a huge increase in energy bills will add to fears that the UK economy is in for a grim few quarters. Government regulator OFGEM announced today that the typical household energy bill will be £3,549 a year in October, an 80% increase on the current energy price cap of £1,971. And the situation will get much worse unless the government intervenes forcefully. According to Citi economists, the consumer price index could reach 18% in January, while the CPI is expected to reach 21%. Citi expects UK energy bills to reach GBP 4,567 in January 2023 and GBP 5,816 in April.

The new UK government, expected to be appointed on September 5, must act decisively and quickly to curb these massive energy price increases. Any payments or subsidies for energy prices will be required immediately, adding to inflation fears in the UK. A 50-basis point rate hike at the next BoE meeting on September 15 is already fully priced in, and markets are now starting to price in a 4% policy rate next year, compared to the current level of 1.75%. The UK government bond market saw a significant repricing of yields in August, with the interest rate-sensitive two-year bond up over 110 basis points since the beginning of the month.

The last days of August and the first days of September will see a slew of growth, inflation, and employment data from Europe and North America. The calendar is relatively quiet at the start of the weak period, tightest on Wednesday, and then tapers off again by the end of the week.  

In short, the economic calendar is quite lean in the week ahead, leaving Western currencies vulnerable to macroeconomic headlines and external factors, and marking a volatile finale for the eventful summer of 2022.