Week of 17 AUGUST

This week, traders kept an eye on the situation in the Middle East while reacting to easing US inflation pressures, stronger-than-expected UK GDP growth and the RBA's decision to keep rates unchanged. Gold started the week at $4,400 after weaker US jobs data and rising geopolitical tensions and touched $4,500 mid-week. Market sentiment reversed in the latter half of the week, with the dollar rallying and gold slipping back to $4,400 by Friday.

The week ahead has several notable economic events that could drive markets, including UK employment and inflation data, the release of the latest FOMC minutes, and global flash PMIs.

Week in Review

Markets got off to a rough start as geopolitics asserted itself ahead of risk events. The tech sector underperformed after Intel announced a share offer, and its price dropped 4% on Monday. Crude prices started the week modestly higher after Iran hardened its stance in negotiations with the US, and Trump said he was "low-keying it" with Iran, focusing on economic rather than military pressure. Brent opened the week just under $85 per barrel before climbing to $90 on Tuesday, then reversing after the IEA and OPEC monthly reports suggested a future supply glut dipping as low as $86 at one point. The international price of crude was set to end the week around $88 amid the Middle East conflict, signalling hardening stances.

US CPI data matched expectations, but PPI prices the next day were flat instead of the expected 0.1% increase. This left the impression that inflationary pressures were easing, and the odds of a Fed rate hike in September fell to the low 30s from close to 50-50 earlier in the week. Treasury yields were softer, but a rally in equities helped keep the greenback from declining, with surging risk appetite weighing on gold prices as fears of a Middle East escalation did not materialise.

UK Q2 GDP came in hotter than expected, driven by a surprisingly strong June performance. However, economists cautioned that the bump was driven by transitory effects of warm weather and the World Cup, and markets could grow increasingly concerned about the October budget. The outlook for the BOE's expected rate cut later in the year was largely unchanged. However, the GBPUSD trended higher afterwards.

The RBA kept rates unchanged in a unanimous decision, as was widely expected, with Governor Michelle Bullock giving a somewhat more hawkish speech. Analysts suspect the tone-warning of a tightening was intended to keep inflation expectations in check so the RBA wouldn't have to hike again, as its projections showed consumer price growth returning to target next year. 

The main themes were a resurgence in the AI trade in the latter half of the week, combined with benign US inflation data, which gave markets a positive spin ahead of the weekend and offset geopolitical concerns and elevated crude prices. Meanwhile, weaker Chinese inflation centred ongoing concerns about domestic demand and spurred hope of increased stimulus measures.

Biggest Market Movers

• The yen was the worst performer among the major currencies as the market retraced prior intervention, prompting renewed speculation that authorities would intervene again.
• The loonie was stronger amid a softer outlook for the Fed and elevated crude prices.
• The S&P 500 reached a new all-time high on Thursday, driven by a surge in memory stocks as confidence in the AI trade resumed at the end of earnings season.
• Crude prices were higher, with no sign of easing tensions between the US and Iran, and distillates like gasoline and heating oil rising amid tight distillate balances.
• Bitcoin underperformed, falling below $63K amid regulatory delays and ETF outflows.

Top Events in the Week Ahead

The coming week will be fairly data-heavy but lighter on high-profile events, with several countries reporting inflation numbers, including the UK, Japan and Canada. The highlight of the week is likely to be the release of the minutes from the last FOMC meeting, which kept rates unchanged. However, with the Fed largely avoiding forward guidance, traders may look to other economic indicators to gauge where rates will go, such as earnings from major retailers. The PBOC will hold its loans' prime rate decision, with markets attentive for any signs of future stimulus that could support commodity currencies. Headlines in energy and politics could disrupt the reaction to the data flow.

FOMC Minutes: Jobs Back in Focus

Traders will try to gauge the possibilities of a Fed rate hike in September by analysing the balance between officials concerned about employment and those still focusing on inflation. After the dismal jobs numbers a week ago and easing inflation pressure this week, a "hold" narrative could develop, even as the Fed tries to hold off on providing more concrete guidance. This could significantly affect yields if the odds of a hike fall substantially or the market moves back to pencilling in a September tightening. While the dollar would likely fluctuate, gold is probably the most sensitive asset to the Fed outlook. With signs that a rate hike will be delayed, gold could push toward psychological resistance around $4,500. But indications that the Fed is more likely to tighten could cause the yellow metal to retrace towards support at the 50-day MA at $4,150.

UK Inflation Expected to Rise

The two major data points this week likely to drive the pound are Tuesday's jobs figures and Wednesday's CPI data. The June unemployment rate is projected to remain unchanged at 4.9%, despite an increase in the employment change to 200K from 147K a month earlier. Markets could shrug that off as temporary, driven by the World Cup. Then on Wednesday, the UK July CPI is anticipated to jump to 3.0% from 2.6%, driven by rising energy prices as Ofgem reassessed consumer bills. The core rate, meanwhile, is projected to tick up to 2.75 from 2.6%, keeping the BOE on track for a rate hike next month. Softer-than-expected inflation data could leave the pound weaker, with the GBPUSD heading towards support around the 50-day MA at 1.340. But stronger data could support sterling and push GBPUSD towards resistance at the July high around 1.3550.

Eurozone PMIs Crucial for Euro

Speaking of temporary boosts to the economy, euro traders are likely to pay close attention to Friday's global PMI release, with a focus on European readings. Q2 GDP in the Eurozone surprised to the upside, supporting the euro, but that could have been due to transitory effects (the World Cup is just as popular on the Continent). The consensus is for flash August German manufacturing PMI to advance to 52.2 from 52.0 in July, while the composite Eurozone PMI is projected to move further into expansion to 52.0 from 51.6 a month earlier. If the number beats, markets could be reassured and push EURUSD towards psychological resistance at the 1.1600 level. But a disappointment could see the pair retrace towards August lows just above the 1.1500 handle.

Other Events and Earnings

On Monday, China has industrial production data. Tuesday brings German ZEW economic sentiment. Wednesday includes a speech by ECB President Christine Lagarde ahead of the release of ECB minutes on Thursday. Friday includes Japan inflation figures. Earnings season comes to its unofficial end this week, with notable names reporting, such as Home Depot, Keysight Technologies, Analog Devices, Target, Lowe's, Walmart, Alibaba, Deere and Buckle.