Last Friday (August 23), Federal Reserve Chairman Powell indicated that the time for policy adjustment had arrived, hinting at a possible rate cut. Analysts believe this is Powell's clearest signal of a rate cut to date.
Powell mentioned, "The time for policy adjustment has matured. We are more confident about heading towards the 2% inflation target. We are not seeking to further tighten the labor market. We will do our utmost to maintain a robust job market while making more progress in ensuring price stability. The current policy rate provides enough room to address various risks, including potential labor market weaknesses."
The minutes of the Federal Reserve meeting released last Wednesday showed that most policymakers support a rate cut in September, with some participants believing that the conditions for a cut were already met in July.
The minutes stated, "Some members believed that recent inflation progress and rising unemployment provided a reasonable basis to lower the target range for the policy rate by 25 basis points at this meeting, or they could have supported such a decision. Most believe that if future data align with expectations, easing policy at the next meeting may be appropriate."
The US Dollar Index fell sharply by 0.82% last Friday, closing at 100.68 points. The index dropped 172 points throughout the week, a decline of 1.68%.
Will PCE Inflation Data Disappoint the Doves?
The long-awaited dovish policy shift from the Federal Reserve seems imminent, and the market is gearing up for the September 17-18 meeting, which could see the first rate cut of this cycle. However, the Fed's decision remains highly data-dependent, as the September decision will also include the latest dot plot, and the trajectory of interest rates is not fully determined.
The renowned institution XM pointed out that hawkish members of the Federal Open Market Committee (FOMC) still see upward risks to inflation. If the Fed were to cut rates by 100 basis points in 2024 as the market expects, the forthcoming data would need to show a significant decline.
Therefore, the personal income and spending report on Friday, which includes the critical Personal Consumption Expenditures (PCE) price index, will be in the spotlight once again.
Currently, the U.S. core PCE price index rose 2.6% year-on-year in June and is expected to remain at this level in July. Overall PCE data is also expected to stay steady at 2.5%.
As the Fed's preferred inflation indicator, changes in the core PCE price index year-on-year have a significant impact on decision-makers.
The July core PCE price index is expected to increase by 0.2% month-on-month. FXStreet analyst Eren Sengezer noted that given Powell's recent statements indicating a stronger focus on the labor market rather than inflation, a 0.4% or higher reading might be needed to drive a strong dollar resurgence.
Meanwhile, personal consumption in July is expected to grow 0.5% month-on-month. This could ease recession concerns but might also weaken hopes for a substantial rate cut. Additionally, personal income in July is anticipated to grow by only 0.2%.
Despite the sharp decline of the dollar last week, it may rebound if economic data exceeds expectations.
US Treasury Auctions and Nvidia Earnings to Be Revealed
Ahead of the key PCE inflation data on Friday, the U.S. July durable goods orders will be released on Monday, and the Conference Board Consumer Confidence Index for August will be published on Tuesday. Additionally, the revised GDP for the second quarter will be available on Thursday, and the Chicago PMI data will be released on Friday.
Federal Reserve officials will have limited public speaking engagements this week. Investors should follow the tone set by Powell in his Jackson Hole speech ahead of Friday's PCE data release. However, a slew of U.S. Treasury auctions in the coming week may cause volatility in the bond market as trading volumes pick up from the summer lull.
In the stock market, Nvidia's latest earnings report, to be released on Wednesday, will be a focal point for traders.
Nvidia has been a primary driver of the substantial rise in large-cap tech stock prices this year, providing investors with over 150% returns year-to-date. While performance has been mixed among other tech giants in the U.S., Nvidia's report could be a key factor in the future trends of large-cap tech stocks.
Eurozone Inflation Report to Influence ECB Policy Outlook
The EUR/USD exchange rate surged this month, breaking the 1.11 mark for the first time since December last year. Despite widespread expectations that the European Central Bank (ECB) will cut rates again in September, the euro remains strong.
However, while a rate cut in September is highly likely, there is also a risk that ECB policymakers may not deem another rate cut necessary.
The flash CPI data for August in the Eurozone, to be released on Friday, will play a crucial role in whether the ECB will further ease policy.
The overall inflation rate in the Eurozone is expected to drop to 2.3% year-on-year in August from 2.6% in July, closer to the ECB’s 2% target. The core inflation rate, excluding all volatile factors, is expected to dip slightly to 2.8%.
XM stated that if inflation data falls below expectations, it might further push up the EUR/USD exchange rate but is unlikely to change market expectations for a rate cut in September.
Regarding other important economic data from the Eurozone, Monday’s German Ifo Business Climate Index and Thursday’s Economic Sentiment Indicator for the Eurozone will draw market attention.
BOJ's Next Steps May Depend on Tokyo CPI Data
The yen has been weak, partly due to the Bank of Japan's monetary policy stance. Japan's prolonged ultra-loose monetary policy seems to be nearing its end, causing investor concerns. The BOJ announced a rate hike at its July meeting and stated it would gradually scale back asset purchases.
The BOJ is expected to raise rates for the third time by the end of the year. Despite concerns over current market volatility, Governor Kazuo Ueda hinted that further rate hikes might be needed if the economy and inflation stay on track.
Thus, the Tokyo CPI data to be released on Friday will be very important, as it is seen as a precursor to the national CPI data, which will be released later.
Tokyo's CPI for August is expected to grow by 2.2% year-on-year, while the core CPI is anticipated to rise from 2.2% to 2.3%.
Next Friday, Japan will also release a slew of other economic indicators, including the preliminary industrial production data for July, retail sales, and the unemployment rate.
RBA Focuses on Inflation Progress
In Australia, inflation remains the focal point. The monthly CPI data will be released on Wednesday, and due to ongoing concerns over inflation, these figures will be closely watched by investors.
In June, Australia's CPI year-on-year slightly fell to 3.8%, after several months of rising.
However, policymakers at the Reserve Bank of Australia (RBA) want to see further reductions in CPI before relinquishing their hawkish stance.
If July’s inflation does not show new progress, the RBA is almost certain to rule out the possibility of a rate cut this year, which would be favorable for the Australian dollar. In August, the AUD/USD rose by nearly 3%.
However, if Australia's second-quarter construction and capital expenditure data, to be published on Wednesday and Thursday respectively, fall short of expectations, the Australian dollar may face some downward pressure.
Canadian GDP to Influence Bank of Canada’s Policy Decisions
The Bank of Canada, which has led the way on rate cuts, is expected by the market to cut rates by 25 basis points in September, with the probability exceeding 90%, due to overall inflation meeting expectations.
However, if economic growth exceeds expectations, it might prompt the policymakers at the Bank of Canada to hold off on any action. Thus, the market will closely watch the second-quarter GDP data due on Friday.
Additionally, Thursday’s wage growth data for June may also impact the Canadian dollar.
