Soft Landing Versus Recession

Impact on GBP:

Governor Bailey yet to turn fully dovish

UK money markets have yet to fully react to Bank of England Governor Andrew Bailey's speech last Friday. Unlike Powell, Governor Bailey remained concerned over the "intrinsic" inflation in the economy and also felt that the economic costs of tighter policy could be less than what they were in the past. His comments stand to keep a wedge between US and UK rates, where money markets continue to price a shallower and slower easing cycle for the BoE.

GBP/USD could see some consolidation in a $1.31-$1.32 range before moving higher still. GBP/EUR could make a run towards its recent €1.1900 highs.?

No Major Data

Impact on EUR:

A coiled spring?

Traders think EUR/USD does resemble a coiled spring and that a move above $1.12 could trigger some strong follow-through buying as the speculative community sniffs out a new trend. Yet it is not clear from where that catalyst for a break-out will come this week. Markets have discussed Dollar inputs above and from the Eurozone side, the main candidate could potentially be Friday's release of the flash CPI data for August. Any upside surprise here could rein in the market's pricing of two-and-a-half ECB rate cuts by year-end, narrow EUR:USD two-year swap differentials still further and support EUR/USD.

On the subject of ECB rate cuts, let's see what the two hawks, Klaas Knot and Joachim Nagel, have to say when they speak today. Elsewhere, the run-up in oil prices on the back of increased Middle East tension and Libyan supply challenges will not be helping EUR/USD. And after a strong rally since early August, it looks like EUR/USD could be due some consolidation. Traders would favour a $1.1100-$1.1200 trading range for now – waiting for some US activity data to disappoint.

No Major Data

Impact on USD:

The activity data will now be key

Fed Chair Jerome Powell used his speech at the Jackson Hole symposium to pre-announce the start of the Fed's easing cycle in September. Short-dated US rates fell about 15bp into Monday's session and the DXY dollar index sold off around 1%. In effect, Powell declared the inflation battle won, with the attention now turning squarely to the US labour market. The latter featured heavily in Powell's speech.

Lower Dollar levels from here require much weaker US activity data, where focus will be given to the August jobs report on 6 September. This week sees some second-tier US activity data in the form of consumer confidence (released today and Friday), plus the weekly initial claims data (Thursday) and personal income and spending data (Friday). Given Powell's speech on Friday, the release of the Fed's preferred measure of inflation – the core PCE deflator – probably takes on a less pivotal role now. And a 0.2% month-on-month release is unlikely to move markets much.

No Major Data