In the past week, financial markets focused once again on the geopolitical situation, mainly related to the Middle East, but due to the lack of major narrative shifts, investors shifted their focus increasingly toward incoming macroeconomic data. Once again, we saw a series of data releases that should keep the Fed away from potential interest rate hikes.
This week will bring investors a series of key macroeconomic and corporate catalysts. The spotlight will be on the release of the minutes from the July Fed meeting (FOMC Minutes), financial results from major US retail chains (led by Walmart), a series of inflation readings (including from Japan and the UK), and preliminary PMI indicators for major economies.
Given this schedule, the markets with the highest potential for volatility this week will be USDJPY, US500, and GBPUSD.
USDJPY
The Japanese currency faces a week packed with significant macroeconomic releases that could set the direction for the USDJPY pair in the coming weeks. At the start of the week, the market is analyzing Japan's Q2 GDP estimates. Meanwhile, on Friday, a key CPI inflation reading from Japan and the preliminary PMI indicator for the economy will be published. On the dollar side, Wednesday's minutes from the recent Fed meeting ("FOMC minutes") will be crucial.
Meanwhile, the Bank of Japan (BoJ) remains under pressure due to rising living costs and wage pressures. In the past, higher CPI inflation readings sparked speculation about faster monetary policy tightening by the BoJ, leading to sharp reactions in the yen. Currently, the market is already pricing in an 80% chance of a rate hike in September, which could support recent efforts by the governments of Japan and the US to strengthen the yen. If Friday's inflation surprises to the upside and Wednesday's Fed minutes reveal greater concerns among American policymakers about an economic slowdown, the USDJPY pair could come under downward pressure.
US500 (S&P 500 futures)
US stock indices are entering a test of domestic consumer health. Although earnings season is nearly over, financial reports from retail giants lie ahead: Home Depot (Tuesday), Target and Lowe's (Wednesday), and Walmart (Thursday). Completing the picture of the US economy will be Wednesday's minutes from the last Fed meeting and Friday's preliminary manufacturing and services PMI readings from the US.
It is worth noting that Walmart's earnings serve as a litmus test for assessing nearly 70% of US GDP generated by consumption. Historically, guidance from Walmart's management regarding consumer demand could trigger strong movements across the entire S&P 500 index. Weaker forecasts combined with FOMC minutes pointing to persistent inflation risks could become a pretext for profit-taking in the stock market. At the same time, the US stock market will remain sensitive to changing expectations regarding interest rate prospects.
GBPUSD
The third market worth special attention is the so-called "Cable", namely the GBPUSD pair, primarily due to an exceptionally tight calendar for the UK economy. On Tuesday, we will get labor market data from the UK (unemployment rate forecast at 4.9%), on Wednesday a key CPI inflation report (forecasted reading of 2.6% YoY), and on Friday preliminary PMI indicators and retail sales data.
Market pricing of future Bank of England (BoE) interest rates is extremely sensitive to wage pressure and services sector inflation. Higher-than-expected UK CPI readings in recent months effectively prevented the BoE from making a dovish pivot, but at the same time, the Bank of England itself did not decide to raise interest rates this year like the ECB, even though during the ongoing energy crisis up to 3 or 4 hikes were priced in for this year. Currently, the market expects only or as many as a single move by the end of this year. If Wednesday's inflation surprises to the upside while US PMI data disappoints on Friday, the GBPUSD pair could receive a strong upward boost.
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