Next week’s data raft should keep FX markets volatile

The US consumer price index measure of inflation rose 0.1% month-over-month in July but failed to match expectations of a 0.2% rise as we had envisaged in our AUD/USD report earlier. The dollar initially fell then bounced back against a number of currencies as traders banked profit ahead of the weekend. Stocks meanwhile came sharply off lows as the weaker inflation data suggested the Fed may hold off raising interest rates aggressively. Crude oil bounced after Thursday’s sharp sell-off and this offered further support to some stocks in the energy sector. Geopolitical concerns kept the gains in check, however. US President Donal Trump tweeted: "Military solutions are now fully in place, locked and loaded, should North Korea act unwisely. Hopefully Kim Jong-un will find another path!"

This week's lack of significant economic data (except Friday's US CPI and RBNZ in midweek) could not stop the markets from turning volatile, as tensions between the US and North Korea weighed heavy on sentiment. Next week, the calendar looks a lot busier, so there’s lots to look forward to.

Things will kick off in New Zealand with the release of quarterly retail sales on Sunday night (all in London time, BST). Last quarter wasn’t kind for the NZ economy as inflation and employment both disappointed expectations. Consequently, the RBNZ delivered a dovish policy statement in which it said policy will remain accommodative for a long time. The NZD dropped sharply. It is worth keeping an eye out on the AUD/NZD pair in particular because there is a possibility for a bullish breakout above 1.0850, as we discussed the possibility in a report on Thursday HERE. From a fundamental point of view, this pair will be in focus again next week because of not only NZ retail sales but also Aussie employment figures on Thursday, not to mention other important data releases for this pair including GTD Price Index (Tuesday) and NZ PPI (Thursday).

Monday will also see the release of Japanese GDP and Chinese industrial production data, both of which are important for the Asian currencies, and possibly the stock market too. The yen has found strong support amid safe haven flows due to the rising tensions between the US and North Korea. Although military action is highly unlikely in our view, the markets are taking no chances. If tensions unexpectedly ease then the yen could fall sharply as safe haven bets are unwound, regardless of Japanese data. On Tuesday, minutes from the RBA’s last policy meeting will be released, which may contain some surprise and cause the AUD to move.

But there will be more important data elsewhere on Tuesday, including German GDP, UK CPI and US retail sales. So, the EUR/GBP, EUR/USD and GBP/USD are the pairs to focus on then. Any further improvement in German data will only increase the pressure on the ECB to begin tightening its policy. In the UK, data has weakened somewhat in recent months, including CPI inflation which eased to 2.6% form 2.9% previously last month. Any further weakness in CPI could weigh further on the pound. However a surprise uptick in CPI or wages data – which will be released on Wednesday – could see the pound make a comeback. The 1.30 handle is pivotal for the Cable, while 0.90 is the key support on the Chunnal. For the EUR/USD, the 1.1710 level is very important to hold as far as the bulls are concerned. If it breaks down on a daily closing basis then we could see the unwinding of the euro long positions. Eurozone GDP is due for release on Wednesday, as is the FOMC meeting minutes later on in the day.

On Wednesday night, going into Thursday we will have those Australian jobs figures as discussed earlier. On Thursday morning, there we will be more UK data in the form of retail sales, followed by the release of ECB’s last policy meeting minutes and a handful of US macro pointers including industrial production. There is not a lot on the agenda on Friday except Canadian CPI and a US consumer sentiment index from the University of Michigan.