Potential market instability amid busy week of policy meetings and data releases

Last week saw the Euro Stoxx 50 rose by 1.7%, and the S&P 500 gain 1.0% amid mixed sentiment regarding a number of central bank meetings, and some key data releases. The US rates were generally unchanged, while Eurozone rates softened slightly. The US Fed and the ECB raised rates by 25bps as expected. Frustratingly for traders, neither would be drawn into providing any guidance on the future path of interest rates, emphasising that they will take a highly data-dependent approach in setting future policy.

Data wise, US wage and price inflation showed further signs of easing in Q2 and German and French inflation fell in July, however Spain saw a sharp rise. Across the rest of the eurozone, survey data for July indicated that the Eurozone economy lost momentum at the start of Q3.

On the currency front, the euro was on the defensive while yen finished last week in a stronger position. However, in overnight action, the yen has weakened following the BoJ’s intervention to curtail upward pressure on Japanese bond yields. EUR/USD opens this morning back at $1.10. GBP/EUR is at €1.16 and USD/JPY is in the top half of ￥141-142.

As we look to the week ahead, focus turns to the BoE policy meeting. Markets have priced in a 25bps rate hike, deviation from this may cause some market shock, however some traders haven’t ruled out a 50bps hike. Elsewhere, a busy data schedule includes the first reading of Eurozone Q2 GDP, and the flash reading of HICP inflation for July. USD traders will keep their pencils sharp for non-farm payrolls on Friday.