The Week Ahead: Fed Decision the Epicenter of Global Markets

Highlights

• The Fed’s interest rate decision is pivotal, with the economic projections and Fed chair under watch.
• Private sector PMIs to define the current macroeconomic environment.
• The Bank of England and the GBP are likely to face a difficult week.

For the Dollar:

Housing sector data should have a limited impact on the global financial markets on Tuesday. The market will focus on the Fed, the interest rate decision, economic projections, and Fed Chair Powell’s press conference.

Investors are betting on a September pause and leaning toward the Fed ending its monetary policy tightening cycle. Hawkish projections and a hawkish Fed Chair would spur a dollar breakout.

US jobless claims and the Philly Fed Manufacturing Index will draw interest on Thursday. However, unless there is a spike in jobless claims, private sector PMIs should have more impact on Friday.

For the EUR:

Following last week’s volatility surrounding the EUR, the upcoming week is expected to be more subdued.

Finalized Eurozone inflation numbers will need consideration on Tuesday. The markets are betting on the ECB ending its monetary policy tightening cycle. Upward revisions to core inflation would move the dial.

Investors should also consider German producer prices on Wednesday. With the German economy heading into a recession, a more marked fall in producer prices would signal further demand weakness.

However, preliminary private sector PMIs for France, Germany, and the Eurozone will impact the buyer appetite for the EUR/USD. A more marked contraction across the services sector would cement bets on a prolonged euro-area economic recession.

Beyond the numbers, investors should monitor the ECB calendar for ECB commentary throughout the week.

For the Pound:

The Pound will likely face another tumultuous week ahead.

UK inflation figures for August kickstart the week. The Wednesday report precedes the Bank of England monetary policy decision on Thursday.

The markets expect the BoE to hit the brakes. Hotter-than-expected inflation figures would fuel uncertainty toward the Thursday decision.

On Friday, retail sales and private sector PMI figures could further support bets on a UK recession.

Beyond the numbers, Bank of England member speeches also need consideration.

For the Loonie:

Housing starts on Monday are unlikely to significantly affect the Loonie. However, August inflation figures will move the dial on Tuesday. As central banks begin to take their feet off the gas, a pickup in inflationary pressure would test the policy pause theory.

Retail sales figures also need consideration on Friday as investors assess the impact of synchronized central bank interest rate hikes on the global economy.

Out of Asia:

For the Aussie Dollar:

The RBA meeting minutes will draw investor interest on Tuesday. The Aussie Dollar is unlikely to find too much support from the minutes. China’s economic woes, weakening Australian labor market conditions, and rising concerns over household debt and liquidity will likely end the RBA’s campaign to tame inflation.

Beyond the numbers, stimulus talk from Beijing and private sector PMIs from developed economies will also provide direction. A weakening demand environment would weigh on the Aussie dollar.

A third of Australian exports go to China, making China the largest trading partner. An Australian trade-to-GDP ratio of 50% leaves the Australian economy, the Aussie dollar, and labor market conditions sensitive to the Chinese economy. 20% of the Australian jobs market stems from trade.

For the Kiwi Dollar:

Q2 GDP numbers will put the Kiwi Dollar in the spotlight on Thursday. Amidst fears of a downturn across the Asia Pacific region, a bounce back in economic activity would offer relief.

However, Westpac Consumer Sentiment figures will also need consideration. A slump in consumer sentiment would signal a weaker demand outlook.

For the Japanese Yen:

Trade data from Japan will put the Japanese Yen in focus on Wednesday. Economists expect a marked widening in the trade deficit. A wider deficit would support the Bank of Japan’s ultra-loose monetary policy position.

However, inflation and private sector PMI numbers will also move the dial on Friday. The Bank of Japan needs wage growth to fuel demand and demand-driven inflation. Economists expect the annual core inflation rate to soften from 3.1% to 3.0%.

With inflation in focus, the Bank of Japan will deliver its interest rate decision on Friday. While economists expect the BoJ to leave rates in negative territory, forward guidance will be the key. Any hints of a move away from negative rates would yield a Yen breakout.

Out of China

There are no economic indicators to consider this week. However, the PBoC will set the Loan Prime Rates (LPR) on Wednesday. The Friday economic indicators raised hope of a turnaround in economic fortunes and may ease pressure on Beijing to deliver more support.