Market Outlook for the Week of August 01-05

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

The latest GDP showed a consecutive quarter of negative growth and there’s a lot of debate on whether this is a recession or not. Opinions are too divided for now and everyone will take a closer look at this Friday’s employment data for more clues.

The main events for the week ahead are: Tuesday, the cash rate and the RBA Rate statement on Tuesday for the AUD; Wednesday, the CPI m/m data for the CHF and the ISM services PMI for the USD; Thursday, the BOE Monetary policy report and the official bank rate for the GBP; Friday, the NFP, average hourly earnings m/m and the unemployment rate for the USD and the employment change and the unemployment rate for the CAD.

The RBA meeting could be a quiet one. A rate hike of 50 bps is expected at this meeting and another raise in September in order to fight inflation as it seems there are no signs of it cooling down especially because the prices for energy and food are likely to continue to rise.

The CPI m/m data for the CHF will give us clues about a potential rate hike from the SNB in ​​September — 3.6% for July is expected. Last week, the CHF strengthened after a SNB publication meant for “schools and the general public” created volatility in the market as it mentioned the central bank might take policy measures in between meetings, if necessary, something for which there is ample precedent. The SNB is known for surprising the market, so there is a possibility that it won’t wait until September to deliver a rate hike if the inflation data runs hot.

From a seasonality point of view, it’s worth mentioning that the month of August is usually a risk-off month for FX markets with CHF and JPY performing very well and the AUD and NZD declining the most. This can also be the case this year if the fundamentals align.

The BOE is likely to hike rates by 25 bps at this meeting, with other increases to follow in September and November. The UK’s economy is not in a good shape with signs that household incomes are under pressure while the inflation data is at a 40-year high. A recession is expected early next year as a slowdown is unavoidable due to decreasing consumer spending and growth.

For the USD, the ISM manufacturing index data expected Monday could influence the price action if it aligns with the worrying signs from June’s PMI data, confirming a slowdown.

This week is all about the question of whether the US economy is in recession or not. According to Wells Fargo, the definitive call is up to the National Bureau of Economic Research (NBER), whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months .” The Committee tracks six variables across production, income, employment and spending, also known as PIES in the following graphic.

Production is expected to continue losing steam in the current economic condition, income will find it hard to stay in line with inflation, employment looks vulnerable at the moment and spending will likely slow down as people will be more moderate.

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

The Fed signaled that the top priority is fighting inflation, but that every future move will be dependent on incoming data and will be decided from meeting to meeting.

AUD/USD expectations

On the H1 chart, the MACD indicates a bearish divergence and if the fundamentals are in favor it might signal a potential downside move for the pair.

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

On the upside, the next level of resistance is at 0.7050. We must also pay attention to what the USD will do next. If the US data comes soft, the USD could continue its correction and the pair might go up.

GBP/CHF expectations

On the H1 chart, the 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 1.1585 support targeting 1.1540. After that, the next support could be 1.1435. On the upside, next resistance is at 1.1635 and 1.1700.

This week will be in the spotlight because of the BOE meeting which, as I mentioned before, is likely to deliver a 25 bps rate hike, but there are some analysts like those from Nomura and ING that expect a 50 bps rate hike. A 50 bps is more-or-less priced in as analysts from ING point out. A hawkish BOE will push GBP/CHF on the upside. Traders should pay attention to hints about additional rate hikes.

This article was written by Gina Constantin.

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