FX Week Ahead - All eyes on Yellen at Jackson Hole

With not too many items on the economic calendar next week, attention will turn to Fed Chair Janet Yellen when she speaks at this year’s Jackson Hole Symposium in Wyoming, United States. The annual economic policy summit of central bankers and policy experts will be closely watched this year as investors look for clues from Yellen on the timing of the next US rate rise following some hawkish remarks from Fed officials recently. In terms of data, Eurozone flash PMI, second estimates of Q2 GDP from the UK and US, and Japanese CPI will be eyed.

Eurozone PMI to hold steady in August

The flash estimates of the Markit manufacturing and services PMI for the Eurozone will start the week on Tuesday (there is no major data due on Monday). The manufacturing PMI is expected to hold steady at 52.0 in August but the services PMI is forecast to see a slight dip from 52.9 to 52.8 in the flash reading. The composite PMI is also forecast to stay unchanged at 53.2. This would suggest that the Eurozone economy continues to expand at a moderate rate.

Other surveys to watch out of the Eurozone next week are the German Ifo (Thursday) and the European Commission’s flash consumer confidence index (Tuesday). The Ifo business climate index is expected to improve slightly from 108.3 to 108.5 in August, with the current conditions and expectations indices also forecast to rise. The flash reading of the consumer confidence should also see a modest increase from -7.9 to -7.6 in August. The data will likely confirm that the initial hit on euro area confidence from the Brexit shock was short-lived and this could support the single currency higher in the near term as it puts into question the likelihood of further easing by the ECB in September.

UK Q2 GDP expected to be confirmed at 0.6%

Britain’s economic growth rate accelerated to 0.6% q/q in the second quarter of the year, helped by a surge in manufacturing output in April. The second estimate of the second quarter GDP reading is expected to remain unrevised on Friday. The pound could prove sensitive to any downward revision as it would signal the UK economy headed into the Brexit referendum on a weaker note than previously thought.

Japan to stay in deflation in July

Inflation data out of Japan next week is unlikely to bring much cheer to the Bank of Japan as core CPI is forecast to remain in negative territory when released on Thursday. Annual CPI, excluding fresh food prices, is expected to remain unchanged at -0.4% in July – the fifth consecutive month of deflation. The yen’s recent appreciation has complicated the BoJ’s task of lifting prices towards its 2% target, and together with the recent disappointing second quarter growth figures, there is a strong case for the Bank of Japan to announce fresh stimulus measures when it conducts its “comprehensive assessment” of monetary policy at its September meeting.

Yellen likely to overshadow US data

The US will have the busiest calendar week in the coming seven days but Fed Chair Janet Yellen will likely grab most of traders’ attention as she may provide some much-needed guidance on Fed policy when she speaks at the Jackson Hole Symposium on Friday, August 26. Before then though, a number of key releases are due.

New home sales will start the US week on Tuesday, followed by existing home sales on Wednesday. The Markit manufacturing PMI is also out on Wednesday and is forecast to ease slightly to 52.7 in August’s flash reading. On Thursday, the durable goods orders are released and are expected to show a 3.5% m/m rebound in July from a 3.9% drop the prior month. More survey data is due on Friday in the form of the Markit flash services PMI and the final reading of the University of Michigan consumer sentiment index. The second estimate of second quarter growth should also be interesting to watch as US GDP figures tend to see frequent revisions. The initial estimate of second quarter GDP fell short of expectations by a wide margin by coming in at an annualized rate of just 1.2%. Consensus forecasts are for the figure to be revised lower to 1.1%. However, with recent Fed speakers expressing confidence that growth will rebound strongly in the second half of the year, the dollar may not see much reaction to the data unless there is a sharp revision.

Many investors will therefore be looking to Janet Yellen to provide fresh direction on the likely path of US interest rates as markets are currently split evenly on the odds of a December rate hike. Hawkish comments from New York Fed President William Dudley this week heightened speculation that the Fed may be getting ready to lift rates again. Dudley is known to share similar views to that of Yellen so any signs of Yellen sounding less cautious than usual could fuel speculation of further tightening before the end of the year.