Market Outlook for the week of August 01-05

A lot happened in the market last week, with the Fed raising rates as expected by 75 basis points and signaling that more hikes are likely in the future.

The latest GDP showed a consecutive quarter of negative growth and there is much debate over whether or not this is a recession. Opinions are too divided at the moment and everyone will be watching this Friday’s employment data more closely for more clues.

The main events for the coming week are as follows: Spot Rate Tuesday and RBA Rate Statement Tuesday for the AUD; Wednesday, CPI m/m data for CHF and ISM services PMI for USD; On Thursday, the BOE Monetary Policy Report and the Official Bank Rate for the GBP; On Friday, NFP, Average Hourly Wage m/m and Unemployment Rate for USD and Employment Change and Unemployment Rate for CAD.

The RBA meeting could be quiet. A 50 basis point rate hike is expected at this meeting and another hike in September to fight inflation as there appears to be no sign of a slowdown, especially as prices energy and food should continue to increase.

The CPI m/m data for the CHF will give us clues to a possible SNB rate hike in September — 3.6% for July is expected. Last week, the CHF gained strength after an SNB release aimed at “schools and the general public” created volatility in the market as it mentioned that the central bank may take policy action between meetings , if necessary, for which there are many precedents. The SNB is notorious for surprising the market, so it may not wait until September to propose a rate hike if inflation data is up.

From a seasonality perspective, it’s worth mentioning that August is generally a risk-free month for the FX markets, with the CHF and JPY performing very well and the AUD and NZD being the strongest. decrease. This may also be the case this year if the fundamentals align.

The BOE is expected to hike rates by 25 basis points at this meeting, with further hikes to follow in September and November. The UK economy is not in good shape with signs that household incomes are under pressure amid inflation data at their highest level in 40 years. A recession is expected early next year as a slowdown is inevitable due to lower consumer spending and growth.

For the USD, ISM manufacturing data due Monday could influence price action if it lines up with worrying signs from June PMI data, confirming a slowdown.

This week is all about whether the US economy is in recession or not. According to Wells Fargo, the final call lies with the National Bureau of Economic Research (NBER), whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that spreads across the economy and lasts more than a few months”. .” The Committee tracks six variables in production, revenue, employment and expenditure, also referred to as PIES in the following chart.

Output should continue to falter in the current economic climate, incomes will struggle to keep up with inflation, employment looks vulnerable at the moment and spending will likely slow as people become more moderate.

Friday’s NFP is expected to be 250K, the unemployment rate 3.6% and the average hourly wage 0.3%. All eyes are on this NFP print as some economists say strong labor data would be a sign that the US economy is not in recession, although others see two quarters of negative GDP growth. signify a technical recession.

The Fed has signaled that the top priority is fighting inflation, but any future moves will depend on incoming data and will be decided from meeting to meeting.

AUD/USD expectations

On the H1 chart, the MACD is indicating a bearish divergence and if the fundamentals are favourable, this could signal a potential bearish move for the pair.

A key level will be the resistance at 0.7020. If the price won’t break above, the next level of support will be at 0.6920 and if that doesn’t hold, the next one is at 0.6845. Monday is expected to remain quiet until Tuesday’s RBA meeting, but with a 50bps rate hike widely expected, it’s hard to believe the AUD will be supported.

On the upside, the next level of resistance is located at 0.7050. We also need to pay attention to what the USD will do next. If the US data turns weak, the USD could continue its correction and the pair could rise.

GBP/CHF expectations

On the H1 chart, GBP/CHF turned neutral last Friday with some CHF strength expected this week as the SNB turns more hawkish. The pair ended the week near the support at 1.1585 targeting 1.1540. After that, the next support could be 1.1435. On the upside, the next resistance is at 1.1635 and 1.1700.

This week will be in the spotlight due to the BOE meeting which as I mentioned before is expected to lead to a 25bp rate hike but some analysts like those at Nomura and ING are expecting a rate hike of 50 basis points. A 50 bps is more or less integrated, as ING analysts point out. A hawkish BOE will push GBP/CHF higher. Traders should pay attention to hints of further rate hikes.

This article was written by Gina Constantin.

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