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The first full school week after the summer break hasn’t offered markets any new lessons. Instead, with data continuing to show cooling growth condition in the eurozone and China, growth data out of the US suggesting the consumer remains on a solid footing, and near-term interest rate expectations tumbling across major economies, the dollar reigned supreme for the eight consecutive week. With the Federal Reserve now set to embark upon its communications blackout, next week’s ECB meeting posing a credible risk of a further rate hike, and the Bank of Japan preparing to intervene in markets yet again, some within markets may be excused for thinking the dollar’s rally may be losing its legs. However, we don’t agree. On balance, next week’s economic developments are likely to be dollar positive in our view. That is unless weakness in Chinese data prompts authorities to finally unveil the tangible stimulus measures that markets have eagerly been awaiting for a few months or the BoJ throws the kitchen sink at the yen again. Sticking with the known market events, however, we expect next week’s releases to once again reinforce the US exceptionalism narrative. Chinese data, some of which is released over the weekend, is unlikely to show the consumer bursting back into life and could even result in further rate cuts from the PBoC on Friday–an outcome that isn’t just negative for CNY but pro-cyclical FX and JPY. Meanwhile, should the ECB meet our expectations and hike the deposit rate to 4%, this may not necessarily be EUR supportive if it coincides with a substantial near-term growth downgrade in the staff forecasts. In the UK, labour market data should show slack continuing to re-emerge, leading to further downwards pressure on the pound ahead of key inflation data on September 20th. However, the main release will undoubtedly be US CPI. Headline inflation is set to tick up again for a second month, however, markets will cast this to one side and continue focusing on core inflation momentum. Here, we find risks tilted to the upside for the consensus of 0.2% MoM, owing to upticks in airfares and a bottoming out of used car auction prices. If the data prints in line, markets are likely to continue pricing a circa 40% probability of a Fed rate hike given growth conditions are still strong, so no change there. However, if the data ticks higher, markets won’t just have to deal with better prospective capital returns in the US, but also a Fed that is likely to hike once again in Q4. All said and done, next week’s calendar doesn’t pose a threat to throne. All hail King Dollar.
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Authors:
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst
María Marcos, FX Market Analyst
Nick Rees, FX Market Analyst