In the next few days, we’ll find out if U.S. inflation trends require more Fed rate hikes or if UK activity is heading for a “deep recession” as BOE Gov Bailey hinted.
But before that, ICYMI, I’ve written a quick recap of the market themes that pushed currency pairs around last week. Check it!
And now for the closely-watched potential market movers this week:
Major Economic Events:
U.S. inflation reports (Aug 10, 12:30 pm GMT) – Just when markets were warming up to the possibility of the Fed pivoting and raising rates in 2023, FOMC members stepped up and said, “Ehhh. Maybe not.”So, with Friday’s strong NFP supporting an inflationary environment, you can bet that traders will eye this week’s CPI release.
Headline CPI is expected to slow down from 1.3% to 0.4% and bring its annual rate lower from 9.1% to 8.7%. Core inflation, however, could slow down from 0.7% to 0.4% but see a 6.1% annual growth from June’s 5.9% uptick.
Signs that inflation remains elevated despite the Fed’s multiple rate hikes and lower commodity prices would weaken expectations of Fed rate hikes in early 2023 and likely weigh on risk sentiment.
Don’t forget the PPI reports (Aug 11, 12:30 pm GMT) and preliminary UMich consumer sentiment (Aug 12, 2:00 pm GMT) so we can get more clues on Uncle Sam’s inflationary trends!
U.K. Q2 preliminary GDP (Aug 12, 6:00 am GMT) – BOE Gov Bailey’s talks of a “deep recession” spanning five quarters should bring the markets’ attention to this week’s preliminary Q2 GDP reading.
U.K. activity is expected to dip by 0.2% after a 0.8% uptick in Q1. Meanwhile, the annual rate could drop from 8.7% to 2.8%. And that’s with June’s numbers being propped up by the Jubilee celebrations!
Forex Setup of the Week: GBP/USD
This week’s U.S. CPI and U.K. GDP releases should shake up GBP/USD, which is retesting a broken trend line resistance on the daily time frame.Strong inflation figures from the U.S. could lead traders to price in an even more hawkish Fed rate hike schedule or at least pare their expectations of a Fed pivot in 2023.
Hawkish Fed expectations could drag GBP/USD back below its 2022 trend line resistance and probably retest its lows near 1.1800.
I’m not discounting the possibility of a risk-friendly environment, though, or U.K. GDP printing higher than market estimates.
If USD demand doesn’t gain momentum this week, then GBP/USD can bounce from the 50% Fibonacci retracement of July’s upswing and head for its previous highs near 1.2300.