Week ahead – Jackson Hole eyed for Fed pivot; flash PMIs, UK CPI and RBNZ also in focus

• Fed minutes and Powell’s Jackson Hole address may set stage for rate cut
• Flash August PMIs and RBNZ decision also on investors’ radar
• CPI data out of Canada, Japan and UK to be watched for rate clues

Will the Fed turn dovish at Jackson Hole?

The Federal Reserve hasn’t exactly left the headlines since its July 30 policy decision, amid President Trump’s ongoing attacks on the central bank’s chief, Jerome Powell, but it will certainly take centre stage again over the coming week. Hot on the heels of the mixed US CPI report, the Fed will publish the minutes of the July meeting on Wednesday. But the real focus will be on the annual gathering of world central bankers at Jackson Hole, Wyoming, between August 21 and 23.

The three-day symposium on economic policy is typically attended by key figures from the European Central Bank, Bank of Japan and Bank of England, to mention a few, as well as of course from the Fed. More importantly, the Fed has often used the event in the past to signal major policy shifts.

Following on from the unexpectedly soft payrolls report for July and the somewhat encouraging CPI numbers for the same month, Powell will likely pave the way for a rate cut in September. The growing dissent within the FOMC, notably from the governors rather than the regional presidents, as well as the mounting pressure by the White House, suggests a dovish tilt is almost certain.

Tariff uncertainty

The question is, will Powell commit to a rate cut in September and flag further reductions for the rest of the year, or will he stick to the data-dependent approach? Given the uncertainty surrounding the impact of the higher tariffs on inflation, Powell will probably refrain from laying out a specific rate path.

Headline inflation may have defied expectations of an increase to stay unchanged in July, but core CPI edged up to a five-month high of 3.1%. Although there are some signs that tariffs are pushing up the prices of some goods categories, the effect is so far muted. More worrying is the recent pickup in services inflation, which is not linked to tariffs. The ongoing stickiness in services inflation was a key factor in the Fed’s decision to go on pause at the start of the year and may again be used as a reason to remain cautious.

The Fed’s dual mandate dilemma

Most likely, Powell will suggest that the pace of rate cuts will be determined by the extent to which any heating up of inflation is offset by a slowdown in the labour market. This may lead to some paring back of year-end rate cut bets, lifting the US dollar.

However, even if there is some disappointment from Powell maintaining caution and not sounding overly dovish, stocks on Wall Street may not necessarily take a huge hit. Though, this would still raise the risk of the rally cooling in the absence of a fresh boost.

In terms of data, building permits and housing starts for July are due on Tuesday, a Treasury auction for 20-year notes might attract some headlines on Wednesday if demand is weak, while on Thursday, the Philly Fed manufacturing index, S&P Global’s flash PMIs and existing home sales will wrap up the week. Any signs of trouble, either from the housing data or the PMI surveys could add pressure on the Fed and on the dollar ahead of Powell’s speech on Friday.

UK CPI to likely aid pound’s recovery

The Bank of England was pessimistic about the UK’s near-term inflation picture when it hesitantly cut rates by 25 basis points last week to combat rising unemployment. It forecast that headline CPI would peak at 4.0% in September before gradually easing towards its 2.0% target by the middle of 2027. But Wednesday’s CPI readings may well point to inflation peaking even higher.

The headline rate likely rose to slightly below 4.0% in July from 3.6% in June. Higher food and energy prices continue to exert upwards pressure. However, core CPI also remains worryingly elevated and jumped to 3.7% in June. A more modest increase in core inflation in July compared to headline CPI could put some policymakers’ minds at rest, but on the whole, the CPI report will probably continue to fuel the pound’s latest upswing, particularly if the Fed does turn more dovish at Jackson Hole as expected.

With cable fast approaching $1.36 and heading for the July peak of $1.3788, Thursday’s flash PMIs for August and Friday’s retail sales figures for July pose some downside risk should they disappoint. But following the strong rebound in both retail sales and GDP growth in June, not to mention the UK’s more favourable trade deal with the US, investors are somewhat less gloomy about Britain’s economic outlook.

Euro awaits flash PMIs amid tariff setback

Across the channel, some doubts about the economy have recently crept in for the euro area, as the European Union was forced to accept US tariffs of 15%. On the one hand, it could have been a lot worse for Europe’s behemoth car industry, as this represents a reduction from the standard 25% levy it was facing prior to the deal, but steelmakers on the other hand are stuck with the higher 50% rate that Trump has set for the sector.

On the bright side, there’s hopes that the increased defence and infrastructure spending across the continent will more than prop up Eurozone economies should exports to the United States suffer a dip. Nevertheless, the euro’s uptrend against the dollar has been on pause since the beginning of July, with investors potentially looking for some evidence of a turnaround in growth before pushing it higher.

Hence, Thursday’s flash PMIs for August will be watched closely for such clues. A day earlier, the final CPI readings for July are due, although no change is anticipated to the initial estimate of 2.0% in the headline rate.

Canadian CPI on tap

One of the biggest surprises of the recent global wave of trade negotiations has been the no-deal with Canada. Whilst it’s important to point out that the vast majority of Canadian exports to America are covered by the USMCA pact, which enjoy duty-free trade, the 35% tariffs on the remaining goods, as well as those exports that fall under sectoral tariffs such as steel, reflect a souring of trade relations between the two neighbouring countries.

Canada’s GDP declined in both April and May, and there was a large drop in employment in July, suggesting muted economic activity. However, inflation has been headed in the wrong direction in recent months so the Bank of Canada, having already cut rates quite substantially during 2024 and in early 2025, is not expected to cut again until later in the year, most likely in December. Yet, any unanticipated slowdown in inflation could possibly bring forward the timing of the next rate cut, weighing on the Canadian dollar.

The CPI numbers for July are out on Tuesday and will be followed by producer prices on Thursday and June retail sales data on Friday.

RBNZ poised to cut rates again

One central bank that’s unlikely to wait long before trimming rates again is the Reserve Bank of New Zealand. The Pacific nation got a somewhat worse deal than neighbouring Australia with the Trump administration. The 15% tariffs (versus 10% for Australia) has clouded New Zealand’s outlook at a time when the economy is still recovering from last year’s six-month recession. With employment barely growing since then and inflation under control, the RBNZ is widely expected lower rates by 25 bps on Wednesday.

However, the New Zealand dollar’s rection will probably depend on the tone of the meeting rather than the decision itself. If policymakers sound worried about the economy and signal at least one more cut this year, the kiwi could come under pressure. But if worries about inflation prevail and the RBNZ is vague about the likelihood of further cuts, the kiwi could set its sights on the $61 level.

Yen catches a bid ahead of July CPI

The Japanese yen has rebounded sharply from its August 1 low when it briefly breached the 150 mark, amid renewed speculation about a rate hike and a pullback in the dollar. US Treasury Secretary Scott Bessent has accused the Bank of Japan for being ‘behind the curve’ on inflation. His comments have come just as the BoJ is having an internal debate about which measures of underlying inflation it should focus on for targeting inflation.

Investors have subsequently upped their bets of the BoJ resuming its tightening cycle before the year end and see about a 65% probability of a 25-bps hike.

Friday’s CPI data could therefore decide if the yen’s latest bullish momentum lasts or not. The two widely reported CPI measures – one that includes all items and one that excludes fresh foods – have been above 3.0% since late 2024. But the BoJ insists that underlying inflation has yet to reach its 2% target sustainably based on other gauges of core inflation that it looks at.

Although a decision on which readings are more accurate may not be imminent, any upside surprises in the July CPI figures could add to the speculation, further boosting the yen. Other Japanese releases next week include machinery orders and the latest trade numbers on Wednesday, and the flash August PMIs on Thursday.