Market Outlook for the week of August 08-12

Last week, the CPI print data for the CHF was lower than expected and, in reaction, the Swiss franc depreciated. Pantheon analysts say that inflation will peak in August and therefore the CHF will experience a decline in September. It may also mean that the SNB will probably not be as hawkish at the next meeting as expected.

credit: Pantheon via Twitter

The RBA raised rates by 50 basis points and said a more flexible approach going forward was possible. For the September meeting, an increase of 25 basis points is expected.

The BOE also raised its key rate by 50 basis points. Going forward, the BOE will not have a pre-determined trajectory for rate changes as it expects to see 5 negative quarters of GDP from Q4 and inflation up 13.3% YoY in October, followed by high inflation throughout 2023. This is expected to mark the worst financial crisis for the UK in 60 years.

On Friday, US economic data turned stronger than expected, meaning the Fed will need to act aggressively to fight inflation. It looks like the labor market is strong and the US economy is not yet in recession. The odds are now 65% in favor of a 75 basis point hike at the next FOMC meeting.

While it’s debatable whether the US economy is in a recession, the most important aspects to consider are the labor market outlook and corporate earnings. As inflation remains high and probably hasn’t peaked yet, this week’s CPI data is very important to watch. Some Fed members are due to speak this week and at the Jackson Hole symposium we will hear from Powell, who may be more hawkish than expected.

For now, the labor market looks very strong, but there are signs that it is starting to calm down, with job vacancies data falling for the third month in a row in June. Moreover, the unemployment rate is a lagging indicator. As seen in the past, it is not uncommon for first jobless claims to see an increase before the onset of a recession, and claims have seen a steady increase since April. The future does not look very encouraging at the moment and it is likely that things could get worse.

The main events of the week:

  • On Monday, it will be interesting to watch the EUR Sentix Investor Confidence as it may give us some clues even though it shouldn’t be a market mover — a drop is expected;
  • Wednesday we have the CPI m/m for the USD;
  • Thursday USD PPI m/m;
  • Friday we have GDP m/m and preliminary GDP q/q for the GBP.

Analysts expect US inflation data to come in lower than expected. Last month’s inflation was 9.1% and now it is expected to be 8.7%. It is still high and the Fed will have a hard time bringing inflation down to its target. One potential reason for cooling inflation is lower gasoline prices, but core inflation should continue to rise.

UK GDP data for the second quarter will be released this week and expectations are for a decline of -0.2% from the 0.8% release in the first quarter. June GDP is expected to decline 1.2% month-over-month. Although modest GDP growth is possible in the second half of the year, high energy prices will continue to have a negative impact and the UK is set to slip into recession early next year.

USD/CAD expectations

From a technical standpoint, the pair looks bullish, with no major economic news for the CAD this week. All that can influence its direction is the CPI data. Fed speakers Evans, Kashkari and Daly are expected to deliver their remarks. For this week, the fundamentals should be in favor of the USD which should be well supported.

“Low and weakened correlations between the CAD and equities and commodities may tip the risks further towards choppy range trading in the near term,” Scotiabank analysts said.

In conclusion, the conditions for a significant appreciation of the CAD remain very weak.

USD/CAD closed the week near 1.2975. A correction is expected to the support at 1.2885. If this level does not hold, the next support is at 1.2845. After that, the uptrend should resume.

On the upside, the next level of resistance is at 1.3045.

GBP/CHF expectations

On the H1 chart, GBP/CHF looks bearish. A correction is expected to 1.1655, but if the price does not break above, the next level of support will be 1.1575. If that doesn’t hold, the next one is at 1.1525. Further strength is expected for the CHF in the coming week. Also take a look at Friday’s UK GDP data which may weigh on the direction of the pair.

This article was written by Gina Constantin.

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