This week's financial calendar is packed with key data releases that could shape market direction. Investors will be closely watching the Federal Reserve's meeting minutes, Japan's core CPI figures, and the UK's unemployment rate, all of which have the potential to trigger significant volatility across major currency pairs and commodities.
Starting with the Federal Reserve on Thursday at 02:00, the central bank will publish the minutes from its July 28-29 monetary policy meeting. At that meeting, the Fed held the benchmark interest rate steady at 3.5% to 3.75%, a decision that led to a sharp decline in the US Dollar Index and a corresponding rise in gold prices. The release of these minutes could reignite market speculation that the Fed's rate-hiking cycle has run its course, which would be bearish for the US dollar and supportive for precious metals and non-USD currencies.
The US dollar's short-term trend is currently influenced by the coordinated intervention from the US and Japan in the yen market, which has pushed the greenback lower. However, this depreciation is largely artificial and not driven by organic market forces. Meanwhile, tensions between the US and Iran appear to be easing, and while international oil prices remain near the $80 level, the momentum for further gains is clearly weakening. If US inflation shows a noticeable retreat in the coming month, the likelihood of further Fed hikes would diminish significantly, potentially paving the way for a renewed downtrend in the US Dollar Index.
On Friday at 07:30, Japan's Ministry of Internal Affairs and Communications will release the national core CPI for July. The market consensus is for a year-on-year reading of 1.8%, which would be 0.2 percentage points higher than the previous month but still below the Bank of Japan's 2% target. The broader national CPI is also due out at the same time, with expectations of 2.0% year-on-year, up 0.4 percentage points from the prior reading. These forecasts suggest that financial institutions are cautiously optimistic about Japan's price levels moving higher in July.
However, Monday's release of Japan's Q2 GDP deflator came in at 2.6% year-on-year, a significant drop from the previous 3.2%. This deflator, which measures price changes across all goods and services, serves as a more forward-looking indicator of inflation and typically shows a strong correlation with the CPI. Given the notable slowdown in the GDP deflator, there is a reasonable argument that Japan's July core CPI could also come in below expectations, posing a downside risk to the market consensus.
Turning to the UK, Tuesday at 14:00 sees the release of the ILO unemployment rate for the second quarter. The market expects a reading of 4.8%, which would be 0.1 percentage points lower than the prior quarter and below the 5% threshold often considered full employment. Just a day later, on Wednesday at 14:00, the UK's Office for National Statistics will publish a raft of inflation data, including the core CPI for July, expected at 2.5% year-on-year (down 0.1 percentage points), and the headline CPI, expected at 2.9% (up 0.3 percentage points). The back-to-back release of these jobs and inflation figures is likely to cause a notable spike in volatility for GBPUSD.
Since January, the UK's unemployment rate has been on a consistent downward trajectory, with the latest reading already falling below the 5% warning line. This suggests that the risk of a significant labor market contraction is diminishing. For GBPUSD, however, it is the inflation data that tends to move the market more than employment figures. The higher expectation for headline CPI relative to core CPI reflects the gradual pass-through of elevated international energy prices into the UK's consumer market. Due to the UK's energy price cap, there is a natural lag in how global energy costs impact the domestic CPI.
Both the 2.5% core and 2.9% headline CPI forecasts remain comfortably above the 2% target, which puts the Bank of England in a tricky position. Although the BoE has not raised rates since August 2023, persistently high inflation could force its hand. If price pressures continue to build, the probability of future rate hikes will rise, which would likely provide solid support for the British pound.
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