Week Ahead: US CPI and a Bank of England rate hike eyed

Introduction

It is wall-to-wall tier one data for major economies this week. Given the Fed’s focus on inflation the US CPI will be crucial. However, there is a theme of inflation, retail sales and industrial production data for not only the US but several other major economies too.

For the Bank of England, there is plenty of uncertainty surrounding the size of the rate hike. However, with other tier-one UK data also due, this will keep GBP traders on their toes throughout the week.

Watch for:

North America – US CPI and PPI inflation, along with retail sales and industrial production.
Europe – UK unemployment, CPI and retail sales, with the Bank of England key. Eurozone final inflation and industrial production.
Asia – Chinese industrial production and retail sales, in addition to Australian Unemployment and New Zealand GDP
LatAm – Retail sales for Brazil and Colombia, along with Colombian industrial production.

North America

N.B. Forecasts are the latest available consensus

US dollar (USD)

The USD has been very strong for several weeks but took a sharp jolt of profit-taking on Friday. It remains to be seen as to whether this move continues through this week. However, we still see this as a countertrend move to the bigger USD positive outlook that we see continuing.

However, there will be plenty to keep traders on their toes this week. US CPI is the main focus, with the FOMC members repeatedly insisting upon hawkish positioning to tackle inflation. Unless there is a dramatically lower than expected number, it is difficult to see much derailing a 75bps Fed rate hike.

Canadian dollar (CAD)

The CAD may continue to have a hangover from the vague forward guidance that accompanied the 75bps hike by the Bank of Canada last Wednesday. Furthermore, there is no tier one data of note for Canada this week. CAD traders will be casting an eye on moves in the oil price (a rebound in WTI oil would be CAD supportive) and broader risk appetite for any CAD moves.

USD/CAD – The retracement is on with the resistance left around 1.3075/1.3210. If the USD corrective move continues this week an unwind back towards 1.2895 could be seen.

Commodities

A near-term technical rally has been threatening commodities. Metals prices are still negatively correlated to the outlook for the USD. So if the USD gathers pace in a correction this week, then we can expect metals prices to move higher near term. However, as we expect the USD correction to be short-lived, the rebound in metals may begin to struggle. For oil, recession pressures weigh on oil demand and with only a minor OPEC+ production cut, this has been weighing on the oil price.

Brent Crude Oil – continues to be a swing trader’s dream. The latest swing higher from the new support at $88.25 could see a rebound to test the resistance at $93.25/$95.90.
Gold – a break clear above resistance at $1727 opens a recovery potential towards a test of the six-month downtrend and the next resistance band $1754/$1765. However, we still see near-term rallies as a chance to sell.
Silver – a break clear of the resistance at $18.70/$18.90 opens recovery potential towards $19.42/$19.54. However, rallies remain a chance to sell.

Wall Street

The prospects for a continued rebound lie with the broad risk rally and USD correction. If these both continue then there is room for near-term technical rallies to drive a rebound in equity markets.

S&P 500 futures – a near-term recovery within the three-week downtrend. A test of the resistance band 4072/4110 will be a key gauge of how far a recovery can go..
NASDAQ 100 futures – a near-term technical rally within a three-week downtrend will have an important test with the resistance between 12460/12565. If this can be overcome then the more important resistance at 12825/12945 comes into play.
Dow futures – A near-term recovery within a three-week downtrend is set to test the resistance band 32190/32430 which will be an important near to medium-term gauge.

Europe:

N.B. Forecasts are the latest available consensus

Euro (EUR)

The EUR has taken off in recovery since the hawkish ECB decision. Sharp moves higher in Eurozone bond yields have helped the EUR to rebound. Momentum will be important to this move, as will the reaction by markets if EUR begins to stall. However, with recession pressures still prevalent, the ECB tightening into a recession is certainly not a positive for the Eurozone economy. The German ZEW Economic Sentiment and Eurozone Industrial Production numbers should be worth watching.

EUR/USD – rallies towards 1.0100 have consistently failed so any move above this resistance that can hold a breakout will be a significant improvement. The resistance between 1.0100/1.0200 is a key barrier still, as is the seven-month downtrend and 55-day moving average. For this reason, we remain cautious of backing EUR rallies.

British pound (GBP)

It could be a choppy week ahead for GBP positions. There is a string of tier-one data points around the middle of the week to drive volatility. UK CPI is expected to continue to run higher in August and will only add pressure on the Bank of England to hike more aggressively. Consensus is split (possibly slightly favouring 75bps), however, with the promise of fiscal support to cap the cost of energy bills this may persuade the BoE to be slightly more cautious with a 50bps hike.

All that aside, the parlous state of the UK economy leaves us very wary of backing any sort of recovery in GBP for long.

GBP/USD – the pair has tried to engage in a recovery but near-term rallies continue to be very much against the tide of USD outperformance. This suggests that any near-term strength remains a struggle, with resistance at 1.1715/1.1760 key this week.

Indices

The European indices are still taking their cue from Wall Street. Outside of earnings season, broad sentiment along with yields and USD moves are key. If bond yields continue to solidly climb, this is still a difficult environment for equities to consistently perform well. As such we retain our preferred sell-into-strength bias.

DAX – is looking to build momentum in recovery. The index needs a move above 13150 resistance to generate positive recovery momentum this week.
FTSE 100 – the market has recovered well and holding above the pivot band between 7325/7370 will be a stepping stone to further recovery this week.

Asia:

N.B. Forecasts are the latest available consensus

Japanese yen (JPY)

There was some respite from the weakening yen on Friday. However, unless there is a decisive turnaround in the trend the pressure is still on the Bank of Japan to intervene in support of the JPY. The next BoJ meeting is not until 28th September.

USD/JPY – the pair has retraced sharply from the 144.99 resistance and the question is whether this is a sustainable turning point or just a near-term blip. Reaction to the initial support at 138.90/139.40 will be a gauge.
AUD/JPY – with the breakout above 96.88 showing near-term corrective signals a pullback could be seen. An unwind into the support around 95.30/96.20 support band should not be ruled out.

Australian dollar (AUD)

A sharp rebound for AU has unwound some of the recent underperformance (the AUD has not been helped by the tepid reaction to the 50bps hike by the RBA last week). Performance is closely linked to the outlook for risk appetite once more.

AUD/USD – reaction to the resistance band between 0.6840/0.6880 will be key this week. If the rally can overcome this resistance it will set the market on a new recovery swing higher.

New Zealand dollar (NZD)

New Zealand Q2 GDP is expected to show decent growth of +0.8%. However, the driving force of macro risk appetite will be more considerable.

NZD/USD – after a decisive trend lower over the past few weeks there are signs of near-term recovery for the Kiwi. Rallying through the resistance band 0.6155/0.6190 will determine whether serious recovery momentum can build.

LatAm:

N.B. Forecasts are the latest available consensus

Brazilian real (BRL)

It will be a fairly subdued week for Lat Am data. Moves will be around broader market sentiment and the outlook for the USD. As such, we may see more of the recent fluctuations continuing.

USD/BRL – the strengthening USD has stalled in the past week and the resistance between 5.26/5.36 is a barrier to upside traction. We, therefore, look for continued choppy trading.

Mexican peso (MXN)

With no Mexican data of note, the peso will look to continue its recent shallow trend of strengthening versus the USD. It also continues to trade with less volatility than other Lat Am currencies.

USD/MXN –the near to medium-term outlook on USD/MXN remains mixed and is increasingly rangebound over the past month. The support at 19.800/19.850 remains strong but the pivot resistance around 20.200/20.300 is still holding back a recovery.

Please note that, due to the passing of Queen Elizabeth II, the Bank of England monetary policy decision has been postponed until 22nd September.

Introduction

Watch for:

North America – US CPI and PPI inflation, along with retail sales and industrial production.
Europe – UK unemployment, CPI and retail sales, with the Bank of England key. Eurozone final inflation and industrial production.
Asia – Chinese industrial production and retail sales, in addition to Australian Unemployment and New Zealand GDP
LatAm – Retail sales for Brazil and Colombia, along with Colombian industrial production.