GemForex - weekly analysis

This week, Britain and the world will mourn the passing of Queen Elizabeth. As a result, the Bank of England has postponed its upcoming interest rate decision meeting from Thursday to September 22. Nevertheless, the data release will go ahead as planned. This will give the BOE one more week to digest the abundance of UK data this week. After the RBA raised rates by 50 bps, the BOC raised rates by 75 bps, and the ECB raised rates by 75 bps, the BOE is expected to raise rates by 75 bps. “75 bps. - Is the new 25 bp.” - satires wrote. But it is not just the U.K. that has data coming out this week. There is plenty of economic data to influence decisions at upcoming interest rate meetings, including CPI and U.S. retail sales, and a data dump from China on Friday! Lets see what is in the works for the week ahead: 

Last week, the RBA, the BOC, and the ECB raised rates and announced upcoming rate hikes. The RBA raised interest rates by 50 bps, bringing them to 2.35%, and said it expects to raise rates in the coming months to bring inflation down to the 2%-3% target. However, RBA chief Lowe said Thursday that the RBA might slow the pace of tightening. As such, the RBA is only expected to raise rates by 25 bps at its next meeting. 

The BOC raised rates by 75 bps, bringing the key rate to 3.25%. Like the RBA, the BOC said it will need to raise rates further, given the outlook for inflation. On Thursday, the BOC's Rogers said it will take some time for inflation to return to 2%.  Will the BOC raise rates again at its next meeting？  On Friday, Canada released its employment change for August. The print was -39,700, bringing the total number of jobs for the 3 months to -113,500. How many more jobs will be lost before the BOC stops raising rates？

The ECB also raised interest rates by 75 bps, bringing the key rate from 0% to 0.75%. In addition, the statement said that further rate hikes would be necessary to protect against higher inflation expectations. However, Christine Lagarde said that the central bank is not on a pre-planned path and decisions will be made at the end of each meeting.

EU energy ministers held an emergency meeting Friday to discuss the evolving energy crisis in Europe. Five initiatives were discussed, and the topics of energy savings and marginal pricing in the energy market took center stage.

Four of the five initiatives were approved by EU ministers, including peak-hour electricity savings, a cap on excess profits for cheap energy producers, a “solidarity mechanism” for excess profits from fossil fuel companies, and finally, a government liquidity aid program to help utilities. The fifth and final proposal to cap prices on Russian gas imports did not receive sufficient support amid broader support for extending the natural gas price cap to all imports regardless of geographic origin. However, some countries continue to oppose the price cap, arguing that it only encourages consumption, which could exacerbate the current inflation problem. In addition, a price cap on all natural gas imports could discourage LNG exporters from exporting to Europe.

This week's data could influence the Bank of England's decision to raise rates by 50 or 75 bps at its Sept. 22 meeting. In the UK, GDP, manufacturing production, industrial production, change in job applicants, CPI, and retail sales data are coming out. The most important of the data this week will be the August Consumer Price Index. It is expected to rise to 10.2% y/y after July's 10.1% y/y reading. At its last meeting, the Bank of England noted that inflation could rise to 13.3% in October and remain high through the end of 2023. Could a lower-than-expected reading stop the BOE from raising the rate by 75 bps？ That is unlikely.  If inflation does fall below 10%, it is unlikely by much, and inflation will still be extremely high.

There will also be a lot of data coming out in the U.S. that could change the FOMC decision from 75bp to 50bp at the September 21 meeting. These data include the consumer price index, retail sales, the Philly Fed manufacturing index, and the Michigan consumer sentiment index. As in the U.K., the most important of these data will be the August CPI. The core figure is expected to fall to 8.1% y/y from 8.5% y/y in August (and from 9.1% y/y in July). However, the Michigan Consumer Sentiment Index may raise some doubts as it is at an all-time low for the last few months. Also, the inflation component could play a key role if it rises. Note, however, that members of the Federal Reserve will be in the black before the FOMC meeting next week.  Therefore, the markets will not be able to hear any reaction to the data before the meeting.

On Friday, China will release a dump of data on industrial production, retail sales, and the unemployment rate.  Recall that last month's data was terrible, and the PBOC cut interest rates before they were released.  On Wednesday, the PBOC will announce any changes to the 1-year MLF.  If the PBOC knows the data will be bad again on Friday, will it cut rates before then？

Market movers to watch for the upcoming week: 

EUR/USD

Even though the ECB hiked rates last week by 0.75% and signaled further hikes are forthcoming, the Euro did not end the week with strong gains. However, on Monday morning, the Euro rebounded to the 3-week high of 1.01950, amid a general weakening of the Dollar. The residual strength of the US Dollar, plus fundamental headwinds against the Euro, suggests a short-trend trade opportunity is still in sight. 

According to the economics of the National Bank of Canada, the euro will continue to hover around parity with the USD and could remain in this situation for some time. The common currency area is likely headed for negative growth as its economic situation deteriorates. The Euro is seen to be trading sideways in the coming months before moving higher on the back of trade-weighted USD weakness

USD/JPY

The USD/JPY currency pair was again a huge gainer last week, reaching as high as the ¥145 level which had been mentioned as a possible long-term high by a Japanese policymaker, before giving up much of its gains. This strong movement was driven mostly by the Japanese Yen which retains weakness as Japanese policymakers are still trying to inflate their economy, with Japanese inflation remaining well below its 2% target. This puts the Bank of Japan on a very divergent course from every other major central bank. And now, USD/JPY seems to have moved into a consolidative phase. Last Friday, USD dropped sharply and cracked the ‘strong support level at 142.50. The breach of the ’strong support indicates that the 2-week USD rally has ended. The current price actions are likely in the early stages of a consolidation phase. After the recent outsized rally, USD is most likely to consolidate within a broad range of 140.80/144.60. 

It is worth mentioning that the BoJ has been lagging behind other major central banks in the process of policy normalization and remains committed to continuing with its monetary easing. In contrast, the Fed is expected to tighten its policy at a faster pace.

The markets, however, already seem to have priced in a supersized 75 bps rate hike move at the next FOMC meeting on September 20-21. Hence, the USD bulls might wait for the crucial US consumer inflation figures on Tuesday before placing fresh bets, which will play a key role in influencing the Fed's policy outlook. This, in turn, will drive the USD demand and provide a fresh directional impetus to the USD/JPY pair. 

So, it all remains to be seen in the week ahead. Happy profitable trading!