Week ahead: US PCE rates on the horizon

The week is nearing its close and we open a window at what next week has in store for the markets. On Monday we get China’s interest rate decision, Canada’s producer prices rate for August and the Eurozone’s preliminary consumer confidence figure for September. On Tuesday we note Australia’s preliminary manufacturing PMI figure, France’s preliminary services PMI figure , Germany’s preliminary manufacturing figure, the Eurozone’s preliminary composite PMI figure, the UK preliminary services and CBI trends figures and the US S&P preliminary manufacturing PMI figure all for the month of September. On Wednesday we get Japan’s preliminary manufacturing PMI figure for September, Australia’s CPI rate for August, and Germany’s Ifo business climate figure for September. On Thursday, we get Japan’s chain store sales rate for August, Germany’s Ifo consumer sentiment figure for October, the UK’s CBI distributive traders figure for September, the US durable goods rate for August, final GDP rate for Q2 and the weekly initial jobless claims figure. On Friday, we note Japan’s Tokyo CPI rates for September, the US consumption rate for August and the US PCE rates for August , Canada’s final GDP rate for July and the US final UoM consumer sentiment figure for September. On a monetary level we would like to note the Riksbank’s interest rate decision, the CNB’s interest rate decision, the SNB’s interest rate decision.

USD – Fed cuts rates for the first time this year, signals more to follow

On a fundamental level, we note that President Trump is currently on a state visit to the United Kingdom and thus with discussions on Ukraine and Gaza taking place we remain vigilant to any statements being made by the two nations. Moreover, we would like to see if any further investment announcements are made from companies to invest in the UK or the US as it may influence the equities markets in the UK and US. On a monetary level we must of course note that the Fed’s interest decision occurred earlier on this week, with the Fed cutting interest rates by 25 basis points for the first time this year. In terms of how the vote went for the 25 basis point rate cut the only member who opposed was, unsurprisingly Governor Miran who was appointed by President Trump earlier on this week. The bank appears to divided as to how many more rate cuts may occur by the end of the year. Hence the Fed’s division over how many rate cuts remain this year may have aided the dollar. Furthermore, the Fed’s summary of economic projections tend to paint an optimistic view for the US economy which in turn may have countered the dovish sentiment as an optimistic economic outlook could lead to prolonged periods between possible rate cuts. On a macroeconomic level, we would like to point out the release of the US PCE rate for Friday which are the Fed’s favourite tool for measuring inflationary pressures in the US economy. Hence should the PCE rates showcase an acceleration of inflationary pressures it may aid the dollar and vice versa. Of note should be that the Fed’s September projections for the PCE rates are higher than those presented in June, raising concerns about inflation remaining sticky.

Analyst’s opinion (USD)

In our view Powell has managed to rally the Fed to present a unified front with the exception of Governor Miran who was installed earlier on this week by President Trump and thus it comes to no surprise that he voted for a 50bp cut. Moreover the Fed’s SEP is pretty optimistic in our opinion in regards to economic growth in the US and the possibility of inflation being sticky, which may be why we saw strengthening from the dollar despite the bank cutting rates by 25bp. Furthermore, in Fed Chair Powell’s presser he noted that 10 participants wrote down two or more rate cuts by the end of the year whereas 9 participants wrote down fewer than that. Hence the extent of the possible rates cuts by the end of the year are being questioned and we would not be surprised to see every meeting being a ‘live’ one.

GBP – BoE remains on hold

On a fundamental level, as we stated in our US paragraph President Trump is on a state visit to the UK and thus Loonie traders may be on the lookout for any investment announcements from US economy which could provide support for the UK economy. On a macroeconomic level, we note that the UK’s employment data for July was released on Tuesday and tended to showcase a mixed labour market with the employment change figure coming in higher than expected at 232k versus 220k yet the claimant count change figure for August came in higher than expected and comparing the employment change figure to the prior month’s figure, a slightly concerning picture may be emerging. Although the unemployment rate did remain steady at 4.7%. On another note, we would like to point out that the UK’s CPI rates came in as expected which the exception of the UK’s Core CPI rate on a year-on-year basis which came in lower than expected, implying easing inflationary pressures which may have weighed on the pound. For next week, pound traders may be looking forward to the release of the UK’s CBI figures which should they showcase an improvement could support the pound and vice versa, but considering the lack of any high importance financial releases from the UK, the sterling may cede control of it’s direction to other stronger currencies. On a monetary level, we would like to note the BoE’s interest rate decision where the bank remained on hold as it was widely expected. Yet expectations were for one member to vote for a rate cut but that was not the case, with two members having voted for a rate cut. In turn this may have had dovish implications for the sterling, as should more policymakers side with the ‘doves’ in the future, the bank may cut rates earlier than what is currently expected.

Analyst’s opinion (GBP)

The easing of the nation’s Core CPI may be increasing calls for the bank to cut rates and given the potential dovish shift, it could weigh on the sterling in the upcoming week. Yet in our view, considering the financial releases that are expected from the UK, we would not be surprised to see the sterling’s direction being dictated by other currencies such as the dollar.

JPY – BoJ remains on hold, but prepared to hike in the future

On a monetary level, we highlight the release of BoJ’s interest rate which occurred earlier on today, the bank was widely expected to remain on hold with JPY OIS having implied a probability of 94.7% for such a scenario to materialise. As expected the bank remained on hold at 0.5%, yet of interest was the two dissenting votes who had opted for a 25 basis point rate hike. In turn the dissenting votes may be perceived as a possible hawkish shift in the bank in preparation for a rate hike in the near future. Moreover, BOJ Governor Ueda stated “Real interest rates remain very low. If our economic and price forecasts materialise, we will continue to raise interest rates in accordance to improvements in the economy and prices”, implying rate hikes in the future under certain conditions. Hence, the dissenting two votes and the Governor’s comments may have provided some support for the JPY. On a macroeconomic level, Japan’s CPI rates for August were released earlier on today and of interest was the Core CPI rates on a year-on-year level which showcased easing inflationary pressures. However, it’s dovish implications may have been overshadowed from the BOJ’s decision. Nonetheless, Yen traders may be looking forward to the release of the Tokyo CPI rates for September which are due out next Friday. Should they showcase easing inflationary pressures it may weigh on the JPY and vice versa.

Analyst’s opinion (JPY)

“The BOJ remained on hold today as was expected, but of interest was the two dissenting votes which could mark a possible shift in the power dynamics of the bank in favour of a more hawkish stance. In our view we would not surprised to see further policymakers opting for a rate hike in the future should the Tokyo CPI rates next week showcase an acceleration of inflationary pressures in the economy ”

EUR – ECB to remain on a prolonged holding pattern?

On a fundamental level there is a lot going on for EUR traders. In particular, the strikes in France are continuing with 800,000 people having being expected to have joined the protests yesterday stemming from teachers, transport workers, hospital staff, pharmacists and public sector workers in an attempt to exert pressure on the new Prime Minister. Should the strikes continue and fail to die down it may cause concern about the continued political instability in France and may have a negative effect on the EUR. On a macroeconomic level we would like to note that the Eurozone’s headline CPI rates for August came in lower than expected at 2.0% versus 2.1% and thus defying expectations about a possible acceleration of inflationary pressures. In turn this may intensify the narrative that inflation in the Zone is a stable place and thus the need for further rate cuts may be pushed further down the line, which could aid the EUR. On a monetary level this sentiment appears to have been re-iterated by ECB De Guindos who has reportedly stated that there are “very positive news on inflation” and that the ECB should follow a “very prudent” approach, which may imply that the bank may withhold from cutting rates in the near future. For next week, EUR traders may be interested in the release of Germany’s preliminary manufacturing PMI figure and France’s preliminary services PMI figure both for September, where should they showcase an improvement, sentiment surrounding the EU economy may improve and could thus aid the EUR. However, should the figures showcase a deterioration it may spark worries in regards to the EU’s economic resiliency and may have the opposite effect on the common currency.

Analyst’s opinion (EUR)

The state of the EU economy and in particular Germany and France are crucial for the ECB to remain on hold, as should they showcase a resilient manufacturing and services sectors respectively it may provide the bank with the justification to refrain from cutting rates. In our view, the main threat is France and it’s political instability which could jeopardize the rest of the Zone.

AUD – Inflation data next week

The Aussie is about to end the week in the reds against the dollar. On a fundamental level, the Aussie could be subject to unintended side effects as a result of the ongoing trade spat between China and the US. On a macroeconomic level we would like to note the release of Australia’s employment data with the unemployment rate remaining steady at 4.2% , traders may have been slightly concerned with the lower much lower than expected employment change figure for August which came in at -5.4k versus 21.2k which

may raise eyebrows over the state of the Australian labour market. In turn this may have weighed on the Aussie. For next week traders may be interested in the nation’s inflation data for August which is expected to be released on Wednesday. Should the CPI rate showcase an acceleration of inflationary pressures in the Australian economy it may increase calls on the RBA to act in order to combat the risks of inflation and could thus aid the Aussie. Whereas should the CPI rates showcase easing inflationary pressures in the Australian economy it may weigh on the AUD.

Analyst’s opinion (AUD)

Aussie traders may find some excitement next week with the release of Australia’s CPI rates. Thus, some interest may be garnered surrounding the inflation story in Australia. In our view, the inflation story is interesting although the impact as a result of the CPI rates could be mitigated from other financial releases stemming from other nation’s.

CAD – BoC cuts rates as expected

On a macro economic level, we note that Canada’s CPI rates for August came in lower than expected implying easing inflationary pressures in the Canadian eocnomy which may have weighed on the Canadian dollar as calls for the bank to refrain from cutting rates may have further eased. For next week we would like to note Canada’s final GDP rate for July where should it showcase an improvement and imply economic growth for Canada, it may aid the Loonie and vice versa. On a monetary level the bank of Canada cut rates earlier on this week as was widely expected which may have further weighed on the Loonie. The cut marks a 3-year low for the bank’s policy rate with BoC Governor Macklem stating “But with a weaker economy and less upside risk to inflation, Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks going forward”,

showcasing the bank’s worries about the possible impact on the Canadian economy as a result of tariffs. In turn should the bank decide to cut rates or signal their desire to do so in the future it may weigh on the Loonie.

Analyst’s opinion (CAD)

The BOC cut rates as was widely expected but of interest were also the CPI rates which showcased easing inflationary pressures in the Canadian economy. Hence, should further financial data support another rate cut it may weigh on the Loonie.

General comment

In the coming week we expect the USD to gain more initiative in the FX market considering the upcoming release of the US PCE rates. Major US equities markets indexes, such as Dow Jones, S&P 500 and Nasdaq were all in the greens. Intel may have been the main gainer for the week as its share price rallied following Nvidia’s announcement this week. As for gold we note a new all time high was formed but appears to have since retreated from that level. The bullish outlook for the precious metal continues to be tested yet the market sentiment for the time being seems to remain bullish.