Fundamental Analysis

Week Ahead - Yellen and Draghi at Jackson Hole to Take Centre Stage in Quiet Data Week

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All eyes will be on the central bankers gathering in Jackson Hole, Wyoming in the United States where the heads of the Federal Reserve and the European Central Bank will be making keynote speeches. The event will likely dominate traders' attention in an otherwise muted week for data releases. The main data to watch out for will be flash PMIs out of the Eurozone, Japanese inflation figures and durable goods orders in the US.

Eurozone business surveys in focus

It will be a loaded week for Eurozone business surveys as the closely watched flash PMI readings are released alongside the German ZEW and Ifo reports. Starting things off is the German ZEW survey on Tuesday. The ZEW economic sentiment index is expected to continue to retreat from May's two-year highs, though not straying too far from those levels. The current conditions index is also forecast to ease. The IHS Markit flash PMIs for August will follow on Wednesday. Activity in the euro area has been moderating from the six-year highs set in April according to the PMIs and this trend is expected to continue in August. The composite PMI is forecast to drop marginally from 55.7 to 55.5 in August. Rounding up the week on Friday will be the Ifo business sentiment gauge, which is not expected to buck the trend either and is also forecast to deteriorate slightly in August.

Japanese inflation to make another miniscule leap towards target

The Bank of Japan is expected to make another painstakingly slow progress towards its inflation goal with annual CPI excluding fresh foods inching up to 0.5% in July from 0.4%. However, this would still be a far distant from the 2% target and the data, due on Thursday, is unlikely to get much of a reaction in the forex markets as the BoJ is not seen to be withdrawing stimulus anytime soon. In the meantime, the latest bout of risk aversion that has generated fresh safe-have flows towards the yen could complicate the BoJ's efforts. Also to watch out of Japan next week is the flash Nikkei/Markit manufacturing PMI on Wednesday.

Canadian retail sales to stay strong

Buoyant consumer spending was one of the reasons why the Bank of Canada raised rates in July as retail sales have beaten expectations for the past three months. June retail sales numbers are out on Tuesday and another positive reading could help the Canadian dollar strengthen further as the loonie attempts to move back towards July's two-year peaks against the greenback after the recent correction.

UK GDP to remain unrevised

The UK will have a very quiet calendar week with the only major data being the second estimate of GDP growth for the second quarter. Growth is forecast to remain unrevised at a quarterly rate of 0.3%, having ended the first half with the slowest pace of expansion since 2012. The second reading will include a breakdown of business investment growth. A slowdown or a negative number would likely fuel fears that the Brexit uncertainty is hurting business spending just as UK consumers are feeling the pinch of living costs increasing faster than wages. Any downside surprises or negative aspects of the data could push sterling to fresh multi-month lows versus the euro.

Yellen and Draghi speeches eyed for market direction

Next week's US data is not expected to attract much headlines with the only major release being the durable goods orders on Friday. Durable goods orders are forecast to decline by 5.5% month-on-month in July, reversing much of the 6.4% gain from June. Before that, the flash manufacturing and services PMIs from IHS Markit will come into focus on Wednesday, along with new home sales. There will be more housing data on Thursday with existing home sales.

Fed Chair Janet Yellen and ECB President Mario Draghi could add some much-needed excitement to the week when they give speeches at the annual Jackson Hole Symposium on August 24-26. Both Yellen and Draghi are due to speak on Friday. Yellen is set to speak on financial stability, and contrary to market rumours, Draghi will not use his address to signal ECB tapering in the autumn. There had been speculation that Draghi would use his appearance at the conference to telegraph a possible tapering of the ECB's asset purchases. Back in 2014 when Draghi last attended the event, he had set the ground for the launch of the ECB's massive stimulus program. But according to a Reuters report, ECB sources have played down the prospect of Draghi delivering any new policy messages. Still, with the Fed getting ready to begin its balance sheet reduction and the ECB preparing to scale back its bond purchases, investors will be eagerly looking for fresh policy signals from the world's two most powerful central banks.

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