There will be little respite for market participants this August. A cluster of policy moves, inflation readings and geopolitical talks promise to keep trading desks and strategists occupied. Key items for the week include possible follow-up currency support to prop up the yen, fresh U.S. inflation statistics, and an interim diplomatic effort between Iran and Oman that could affect control of the Strait of Hormuz.
Currency pressure on Japan
The yen remains a central focus after sliding to levels not seen in decades, a situation that raises costs for fuel imports during an energy shock and puts intense pressure on Japanese policymakers. A widely circulated photograph of a U.S. Treasury official’s to-do list that mentioned purchases of yen, together with an uncommon joint intervention by the United States and Japan to counter yen weakness, appears to have temporarily relieved Tokyo’s immediate concerns.
But the episode leaves several unanswered questions in forex markets. Traders are watching for any signal that Japan’s central bank may be preparing a rate increase in September to support the currency’s rebound. Another point of debate is the choice of euros rather than dollars in the U.S.-Japan operation. Some analysts interpret that as an attempt by the U.S. Treasury to avoid exacerbating strain in the Treasury market by prompting foreign central banks to sell U.S. government debt to finance currency-support activity. The broader discussion over the dollar’s role as the global reserve currency is therefore still in play.
Gulf negotiations and oil routes
Attention is also on talks between Iran and Oman aimed at producing an interim arrangement that would influence control of the Strait of Hormuz. Those discussions have so far proceeded without U.S. involvement or formal U.S. sign-off. Given the conflict has entered its 24th week, market expectations that any agreement will hold are cautious.
Meanwhile, Yemen’s Iran-backed Houthi militias have continued to launch attacks on Saudi Arabia and target tankers transiting the Red Sea, a separate but related route for Gulf oil exports. Political and security developments in these waterways directly affect energy markets and marine insurance costs, and they remain a source of investor concern.
With less than five months until midterm elections, the U.S. president is reported to be seeking a deal. Gasoline prices persist above $4 per gallon and, although inflation is not as severe as worst-case scenarios suggested, it remains a politically salient issue for voters.
Investors may therefore tolerate a short-term diplomatic compromise over the strait if corporate earnings optimism and expectations of productivity gains from artificial intelligence provide enough market reassurance.
Inflation data in the United States
On the economic calendar, U.S. consumer inflation data due midweek could increase pressure on the Federal Reserve to resume hiking. Economists polled expect the July consumer price index to show a 3.4% year-on-year increase, with core CPI - excluding food and energy - forecast to rise 2.5% annually. Producer price figures released the following day should help complete the inflation picture.
The previous month’s CPI and PPI releases came in softer than anticipated, yet inflation remains above the Fed’s 2% objective. Retail sales data scheduled for August 14 will conclude a heavy slate of U.S. indicators. The Federal Reserve left its policy rate unchanged at its last meeting, though three officials dissented in favor of a hike. Markets currently price roughly a 50-50 chance of a rate increase at the Fed’s September gathering.
Other central banks and monetary policy
Monetary policy developments abroad will also matter. The Reserve Bank of Australia is expected to hold its policy rate on Tuesday after implementing three increases earlier this year. Recent Australian data showed consumer prices rose more slowly in the June quarter, and RBA Governor Michele Bullock has said the bank stands ready to raise rates again if required. Market participants generally anticipate the RBA will preserve a hawkish leaning.
Norges Bank is scheduled to meet on Thursday and is similarly forecast to keep rates steady after Norway’s core inflation slowed in June. Together, these meetings will inform whether the global tightening cycle has reached a pause or still retains momentum in some economies.
U.K. growth and a new administration
In Britain, newly installed Prime Minister Andy Burnham will be monitoring second-quarter and June GDP figures due on Thursday. Monthly GDP could show a bounce: June retail sales were unexpectedly robust, buoyed by World Cup-related spending and warm weather, and lower energy prices during a brief U.S.-Iran accord in that month may have supported activity.
However, the quarterly picture may be less encouraging. Strong growth recorded in the first quarter faded in April and May, which could temper hopes for a clear improvement in the three-month series. Burnham, who took office in July, will be seeking a positive surprise comparable to a recent upside revision for euro zone growth; an updated euro zone estimate is also due on Thursday.
What to watch this week
- Potential follow-on intervention and any signals from Japanese monetary authorities about a September rate move.
- Progress, durability and U.S. stance toward an Iran-Oman interim arrangement affecting the Strait of Hormuz.
- U.S. July CPI and subsequent producer price data, plus U.S. retail sales on August 14.
- Monetary policy decisions from the Reserve Bank of Australia and Norges Bank.
- U.K. GDP figures for Q2 and June, and an updated euro zone growth estimate.