Jackson Hole Symposium – 25/08 – this year’s annual central bank Jackson Hole Symposium is entitled “Reassessing Constraints on the Economy and Policy” and will be closely scrutinised for evidence of a Federal Reserve, and central banks more broadly that might be concerned about the risks of overtightening monetary policy at a time when the challenges facing the global economy are numerous. Markets have been rising for several weeks on the basis that for all the Fed’s hawkish rhetoric the central bank will be forced to adopt a dovish pivot when it becomes apparent that inflation has started to top out. We’ve already seen in recent data that US inflation may well have peaked, however markets appear to be betting that it will somehow fall back quite quickly to the 2% target, at the same time as the Fed signals that rate rises are close to their end game. This seems unlikely given that CPI is still at 8.5% and the Fed Funds rate is between 2.25% and 2.5%. Furthermore, the Fed will want to be sure that inflation is falling at a sustainable enough pace before it signals any sort of dovish shift or pivot, especially if inflation proves to be sticky and stalls at around 5%. If inflation finds a base at this sort of level its highly unlikely the Fed will lean into any sort of guidance that suggests a rate cut is coming, which means that further rate rises are much more likely between now and year end, with consensus on a Fed funds rate of between 3.5% to 4%. If markets are looking for Powell to give any indication that the Fed might be about to go soft on inflation, they are likely to be disappointed. The idea that the Fed would start to reverse its rate hiking cycle if inflation is still well above 2% comes across inconceivable and its surprising that the market is even pricing it. This week Powell has the opportunity to prick that misconception.        US Q2 GDP – 25/08 – with the US now in a technical recession, having seen a -0.9% contraction, following on from a -1.6% contraction in Q1, this week’s numbers aren’t expected to tell us anything new about the state of the US economy. The decline in output was a symptom of sharp falls in inventories and gross private domestic investment, which appear to have been hobbled by sky high inflation. Gross private domestic investment also fell sharply falling by 13.5%, while personal consumption rose by 1%, with spending focussed on lower margin items as durable good spending fell by 2.6%.      US PCE Core Deflator (Jul) – 26/08 – having fallen back from a record 5.3% in March to 4.7% in May, we edged back up to 4.8% in June, while Core PCE jumped up to a record high of 6.8%. This jump higher appears to show that inflation is started to become much more embedded into the US economy, and will be something the Fed won’t want to see. It is these numbers that are likely to dictate the Fed’s reaction function on whether it chooses to go with another 75bps move or 50bps when it next meets in September, with the odds favouring a 50bps move. The likelihood of the Fed slowing the pace from 75bps at its last two meetings to 25bps is less likely than a 50bps move. Given the current tone amongst Fed policymakers the bias is more likely to lean towards a tendency to overtighten in the short term and ease off towards year end, than the other way around.   UK flash PMIs (Aug) - 22/08 – have remained in positive territory all of this year despite the combined challenges of rising prices and weakening economic activity. Hiring patterns have remained robust, and while costs have been rising businesses have been able to pass on the increase in costs. At the most recent PMI numbers enthusiasm about the economic outlook was starting to wane and with August being a slow period due to holidays we could well start to see economic activity on the PMI level start to slide into contraction territory.    Germany IFO Business Climate (Aug) – 24/08 – with water levels in the Rhine sliding below the minimum levels that can see trade up and down the river carry traffic and energy rationing already taking place in some German states it would be surprising to see any sort of recovery in German business confidence in August. In July the business climate index fell to 88.6 from 92.2 and the lowest levels since June 2020. The expectations index fell to 80.3 and levels last seen in May 2020, post the pandemic lockdown low of 69.4 in April 2020.   Harbour Energy H1...

With the summer coming to a close, Fed officials will head to Jackson Hole for their annual symposium. Financial conditions have loosened lately despite the forceful rate increases, which is counterproductive for the central bank. If they push back, that could spell trouble for risk assets but good news for the dollar.  Fed summer camp The top brass of the Federal Reserve will head to the central bank’s summer retreat in Jackson Hole, Wyoming on Thursday to discuss monetary policy. This venue has been used in the past to signal major policy shifts, so it is seen as an unofficial policy meeting. Fed officials are caught in a bind. Despite raising interest rates at the speed of light, their actions didn’t have the desired effects. Yields on government bonds have pulled back and stock markets have rallied with a vengeance since June, ignoring signals from policymakers that they are far from declaring victory on inflation.  As Chairman Powell pointed out, Fed policy is transmitted mainly through ‘financial conditions’, which is essentially a code phrase for bond yields and stocks. The central bank needs tighter financial conditions to slow down the economy and tame inflation, but they have been loosening instead.  That’s a problem for the Fed. Inflation is still running at 8.5% and looser financial conditions mean it might stay hot for longer. In turn, that would require more monetary tightening to compensate, putting unnecessary pressure on an economy that is already stalling.  As such, the Fed could push back, either by hyping the prospect of another three-quarter-point rate increase in September that markets currently see as a coin toss or through its balance sheet. The process to reduce the balance sheet has already started and will ramp up next month, with $95 billion in securities rolling off per month as they mature.  If Powell and his colleagues want to tighten financial conditions, all they would have to say is they are having conversations on this topic. It would be a hint that the pace can be ramped up further through active sales of bonds or mortgage backed securities, instead of the current passive rolloff. A more forceful tone could dampen the comeback in equity markets and simultaneously add fuel to the US dollar, which continues to steamroll its opponents. The energy crisis has ravaged the euro, the Bank of Japan’s refusal to tighten policy has crippled the yen, and the implosion in China’s property sector has dismantled the commodity currencies.  There’s also a barrage of US data releases, starting with the S&P Global PMIs for August on Tuesday, which will reveal whether growth and inflationary pressures continue to cool off. Other releases include durable goods orders on Wednesday, the second estimate of GDP for Q2 on Thursday, and the core PCE price index on Friday.  European horror show The past few weeks have been dreadful for the European economy, with the energy shortage pushing natural gas prices on the continent to new records while an intensifying drought in Germany dried up rivers and made it harder to transport supplies.  It’s been a horror show for German industry, whose entire business model used to rely on cheap energy. With gas prices so incredibly high, many companies are uncompetitive and perhaps unprofitable. And if Europe’s powerhouse is struggling, other countries won’t escape unscathed - the supply chain is too interconnected.  Traders will look to the latest PMI business surveys, due out on Tuesday, for an assessment of the damage. Forecasts point to a further cooling of the Eurozone economy in August, with the manufacturing index sinking deeper into contractionary territory and the services print just barely staying in expansion.  If anything, the risks seem tilted towards disappointment considering that European companies also have high exposure to China, where economic growth is evaporating at an astonishing pace. That could curb bets for a three-quarter-point rate hike by the ECB next month, something investors currently assign a 45% probability to, and spell more trouble for the euro.  The latest relief rally in euro/dollar was rejected by the 50-day moving average and if the Fed indeed strikes a hawkish tone next week while business surveys highlight the Eurozone’s economic problems, there could be another battle around parity.  British PMIs eyed too The United Kingdom will also get a glimpse at its own PMI surveys for August on Tuesday. It has been a gruesome year for sterling so far, which is underperforming even the war-stricken euro despite the Bank of England raising interest rates at every meeting.  Although the UK doesn’t import much energy from Russia directly, it is not immune to the energy crisis either. The trade trade deficit has blown up as a result and since the UK also runs a large government deficit, sterling has become very sensitive to any shifts in global risk sentiment.    In other words,...

Summary United States: Expansion Not Yet Heading to the Gallows An increase in real retail sales by our estimates and a rebound in industrial production in July offered evidence beyond recent jobs data that the U.S. economy is not yet in a recession. That said, with new orders in the manufacturing sector slowing sharply and housing activity continuing to tumble, data this week did little to change our view that a downturn in the coming quarters will be hard to avoid. Next week: New Home Sales (Tue), Durable Goods (Wed), Personal Income & Spending (Fri) International: Diverging Paths for Inflation in Canada and U.K. Headline inflation in Canada may be showing signs of cooling down. Overall CPI decelerated to a 7.6% year-over-year pace in July, driven by falling gasoline and energy prices. While inflation in Canada may have peaked in July, price pressures in the U.K. have not yet abated. Headline inflation surprised to the upside, reaching 10.1% year-over-year. We expect U.K. inflation to remain elevated for longer, as another sizable increase in electricity prices is planned for October. Next week: U.K. PMIs (Tue), Eurozone PMIs (Tue), South Africa CPI (Wed) Interest Rate Watch: The Fed Still Has More Work to Do We continue to look for the Fed to hike the federal funds rate another 75 bps at its September 20-21 FOMC meeting and to follow that up with a 50 bps hike in early November and a 25 bps hike in December. After that, we believe the Fed will take a break and see how the rate hikes it has implemented so far affect the broader economy. Topic of the Week: China's Renewed Slowdown Prompts Surprise Rate Cut The combination of COVID containment policies and a struggling property sector has led us to revise our annual GDP forecast consistently lower over the course of this year, and as of now, we believe China's economy will grow a little above 3%. We also believe risks are tilted toward even slower growth than we forecast, and July activity data released over the past few weeks reinforces that view. Read the full report

EUR/USD ranges this week as written Sunday were: 1.0298 to 1.0175. EUR/USD traded 1.0268 to 1.0122 or a 53 pips drop from 1.0175. Next week aligns as 1.0273 to 1.0150. What changed? 25 pips. We're looking for the close around 1.0150 then long again for next week. Big break for higher last week was 1.0420 and next week 1.0396. Oversold EUR/CHF at 0.9688 assists EUR/USD longs next week to target 0.9800's. EUR/JPY's big break at 136.95 broke below Monday and traded 200 pips to 134.93. Next week, 136.82 is the deciding factor for EUR/JPY shorts. Overall range is located from 137.15 to 138.16. Oversold EUR/CAD traded 113 pips higher then dropped 158 pips. The Friday close around 1.3088 would assist again to EUR/CAD longs and further help EUR/USD higher. EUR/NZD approaches 1.6297. A big drop is required for EUR/NZD longs next week or EUR/NZD is placed last to overall trade rankings. EUR/NZD traded its best day yesterday since last Wednesday at 295 pips higher. Last Wednesday traded 235 pips lower. No progress to EUR/NZD except trading normal ranges. EUR/AUD traded 322 pips this week and traveled straight up from Sunday at 1.4392. The move was required to alleviate severe overbought to AUD/EUR. AUD/USD is now fairly perfect to AUD/EUR alignment. Overall, EUR/AUD back to 1.4500's and 1.4400's for next week. EUR/USD driver pairs next week are EUR/CHF and EUR/CAD. GBP/USD range Sunday was located from 1.2178 to 1.2029. GBP/USD 1.2178 held at 1.2141 highs and lows at 1.2029 broke below to 1.1994 or 35 pips. GBP/USD was forced lower by overbought AUD/USD and NZD/USD. Next week 1.2149 to 1.1999 and extremely short range. Long for next week to match EUR/USD longs. GBP/JPY 161.99 traded to 159.00's and 163.00's in a fairly balanced trade week. Shorts next week with focus on 161.82. GBP/JPY larger range remains 148.00's to 168.00's. GBP/CAD traded 159 pips higher this week. A close Friday at 1.5400's then long again for next week. GBP/NZD traded 500 pips this week from 1.8700's to 1.9200's. Higher or lower for GBP/NZD at 1.9277. A significant move lower is required for longs next week. As written Sunday: focus is on deeply oversold wide range currency pairs: GBP/AUD, EUR/AUD, GBP/NZD, EUR/NZD, EUR/CAD, GBP/CAD. The primary concentration to oversold and trades is found in GBP/AUD, EUR/AUD, GBP/NZD and EUR/NZD. GBP/AUD as well failed to disappoint as GBP/AUD traded 383 pips higher this week and straight up from Sunday. Next week's range is located from 1.7378 to 1.7246. AUD/USD now trades oversold and long for next week with focus on 0.7024. AUD/CAD broke 0.9009 and traded 70 ish pips to 0.8951. Higher must break above 0.9020. AUD/NZD broke below 1.1012 and traded 22 pips lower to 1.0990. AUD/USD longs are assisted next week by AUD/CHF and AUD/CAD. NZD/USD longs for next week matches AUD. NZD/USD trades oversold from 0.6260's. NZD/CAD traded 100 pips lower from the break Tuesday at 0.8185. NZD/USD Longs are assisted by NZD/CHF and NZD/CAD as all are in compliance to longs. USD/JPY range this week 132.65 to 135.71 traded 132.58 to 135.49. Shorts for next week and higher prices assists to short profits. JPY cross pairs last weeks traded short ranges and this is positive as ranges are normalizing after months of non normal. This means moves are better predictable, better trades and normal ranges. USD/CAD despite 200 pips traded this week remains a problem currency. The 5 year average approaches at 1.2973. USD/CAD 200 pips is matched by DXY 145 traded pips this week.

The story into the end of the week is all about a repricing of Fed expectations. The market had been all excited about that recent softer US CPI read and tried its hardest to pressure the Fed into a more accommodative message. And yet, this hasn’t been the case.

Australia is expected to have added  25K new jobs in July. The sour market’s sentiment favors a bearish run on a dismal report.  AUD/USD is technically bearish and could extend its decline towards the 0.6850 price zone. Australia will report July employment data on Thursday, August 18. The country is expected to have added roughly 25K new jobs after gaining 88.4K in the previous month, while the Unemployment Rate is foreseen steady at 3.5%. Additionally, the Participation Rate is also seen as stable, at 66.8%. Wages remain well below inflation Ahead of the release, the aussie got hit by a key employment-related report, the Q2 Wage Price Index. The Australian Bureau of Statistics reported wages were up 0.7% in the three months to June, while the annual rate growth was 2.6%, slightly below the 2.7% expected. Still, it is the highest annual rate of growth since Q3 2014. Raising labor demand maintains unemployment at healthy lows, yet wage gains are still lagging behind inflation, which means that real wages are still going backwards. According to the latest official data, the Consumer Price Index stands at 6.1% YoY, more than doubling salaries’ gains. Poor wage growth undermined demand for the Australian dollar, which was further hit by a dismal market mood that boosted demand for the greenback. AUD/USD possible scenarios A solid Australian employment report would be cheered by market players but also have limited positive effects on the aussie, particularly if the market sentiment remains on the back foot.  A dismal report, on the other hand, should exacerbate the dominant trend and push the AUD further down across the FX board. Technically, AUD/USD is bearish. The daily chart shows that the pair has broken below the 38.2% retracement of its latest bullish run between 0.6680 and 0.7136 at 0.6960. The pair has also slid below a now flat 20 SMA while technical indicators head firmly south below their midlines. The immediate Fibonacci support is the 50% retracement of the aforementioned rally at 0.6907, followed by the 0.6850 price zone. Sellers may reappear if the pair manages to recover up to the 0.7020 price zone.