The Week Ahead - Fed Signals & Currency Shifts: The Fed, the Euro, and the Pound in Focus

This week is shaping up to be an important one for global markets, with all eyes on the Federal Reserve’s annual economic symposium in Jackson Hole, running from July 22 to 24. This year’s theme, “Reassessing the Effectiveness and Transmission of Monetary Policy,” couldn’t be more timely given the current economic uncertainties. Investors and analysts alike will be paying close attention to any signals from Fed officials about the future direction of U.S. interest rates.

Key Economic Events Calendar

 Source: Finlogix Economic CalendarThere’s growing speculation that Fed Chair Jerome Powell might hint at the possibility of starting rate cuts as early as September. But the size of the cut is still up in the air. A modest 25 basis points (bps) reduction seems likely, but a larger 50 bps cut would need stronger evidence of a weakening U.S. job market. That’s why the upcoming annual revisions to nonfarm payrolls data will be crucial—they’ll provide more context and could sway the Fed’s decision.

FEDWatch Tool 

 Source: CME FEDWatch Aside from Jackson Hole, we’ll also get the minutes from the Federal Open Market Committee (FOMC) meeting at the end of July. However, with Jackson Hole happening so soon after, these minutes might feel a bit outdated and might not move the markets much.

Meanwhile, in Europe, the focus will be on Sweden, where the Riksbank is the only G10 central bank meeting this week. A 25bps rate cut is expected, bringing the policy rate down to 3.50%. This decision follows a pause in June and is supported by a sharper-than-expected drop in inflation, especially with the key CPIF excluding energy measure dropping to 2.2% in July from 3.0% in May. The Riksbank may prefer smaller, more frequent cuts over one big reduction, with another meeting scheduled for September 25.

Besides central bank activities, there are several important economic data releases to watch. In Canada and Japan, July’s Consumer Price Index (CPI) figures will offer fresh insights into inflationary pressures. In the Eurozone and the UK, August’s Purchasing Managers' Index (PMI) surveys will give early indications of economic activity, which market participants will closely monitor.

The European Central Bank (ECB) will also release its negotiated wage indicator for the second quarter. This is a key measure for understanding wage growth in the Eurozone, which could influence future ECB rate decisions. There’s some uncertainty here—recent collective-bargaining agreements in Germany suggest a 5.6% wage increase for 2024, a rate not seen in over a decade. This could complicate the ECB’s decision-making process, as they’ll need to balance the risks of high wage growth with the need for further monetary easing.

Turning to currency markets, the British pound (GBP) has been recovering after a dip in early August, thanks to improved global investor sentiment. Despite data pointing to potential Bank of England (BoE) rate cuts, the GBP has held its ground. One surprise was the sharper-than-expected drop in services CPI to 5.2% in July from 5.7%, below the BoE’s forecast. However, this drop was driven by volatile factors like airfares, and core services inflation remained steady. As a result, the BoE might take a gradual approach to rate cuts, possibly waiting until November for the next move. This gradual pace should help support the GBP, which still benefits from relatively higher yields and stronger economic momentum.

GBPUSD 1H 

 Source: Finlogix Charts The euro (EUR) has also been strengthening against the U.S. dollar (USD), despite rising U.S. yields. This is partly because markets are scaling back their expectations for a large Fed rate cut in September. As a result, EUR/USD is now testing the upper end of its trading range. The ECB’s wage indicator release will be closely watched, as stronger wage growth could complicate plans for further rate cuts. However, for now, the market remains confident that the ECB will proceed with easing in September.

EURUSD H1

 Source: Finlogix Economic CalendarOverall, this week promises to be a pivotal one for financial markets, with key events and data releases likely to shape monetary policy expectations and market sentiment worldwide.

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