US CPI offered the first positive surprise on inflation in a long time being flat on the month of July versus consensus expectations of 0.2% m/m. And it was not all due to lower gasoline prices as core inflation also undershot expectations rising 0.3% m/m versus consensus of 0.5% m/m. The good news is that there are clear signs that pressure on goods prices are easing: commodity prices have come down, freight costs are lower, supply chains are easing and pricing power is weaker as demand has softened and inventories are high. We also see tentative signs that inflation expectations have peaked. However, it is too early to declare victory over US inflation as several Fed speakers also highlighted afterwards. The labour market is still very tight and employment growth has not yet cooled down suggesting that wage growth will continue to run high. It is currently close to 6%, which is much too high to bring inflation back to 2% on a sustained way. Hence, we still look for the Fed to hike 75bp on 21 September to get rates quickly back to neutral and into restrictive area. Admittedly the probability of only 50bp has increased and the decision will most likely be determined by the next round of payrolls and inflation in early September. In the euro zone the inflation picture has been further complicated over the summer by a strong rise in gas and electricity prices. The warm weather has increased demand for air-conditioning and curtailed electricity production due to droughts that lower water levels in reservoirs and rivers and also led to a reduction in French nuclear power production. For environmental reasons French nuclear plants face restrictions on discharging water into waterways when river temperatures get too high. French electricity prices have doubled over the past three months and are now 10 times higher than in April. The increase is set to push up inflation even further and add to recession risks, thus exacerbating the stagflationary environment. On the geopolitical front China concluded military exercises around Taiwan in what has been the largest scale drills around Taiwan ever. It comes in response to the visit by US speaker of the House Nancy Pelosi, which in China’s view is a breach of the ‘One-China policy’ and a further move towards supporting Taiwan independence. This week we sent out a paper looking into the background of the crisis and assessing the risk of war, see Research China: The risk of a Taiwan war and what it implies – part 1, 11 August. Markets mainly responded to the lower-than-expected US inflation print this week by sending equities and EUR/USD higher. Bond yields initially dropped following the release but moved higher again Thursday as optimism about lower inflation and slower rate hikes faded again. Looking into next week the main releases will be US data on retail sales, regional business surveys for August and housing data. In Europe we get the German ZEW and the final CPI print for August, which provides more details than the flash estimate. China will publish it monthly batch of industrial production, retail sales and home sales. Especially the latter will be interesting given the continued stress in the property market. Norges Bank is set to increase rates by 50bp on Thursday. Download The Full Weekly Focus

After July’s central bank meeting, the RBNZ hinted at concerns about slowing growth. Even heading into July’s meeting the Bank of New Zealand head of research warned that the latest ANZ Bank survey of business opinion was ’littered with indicators that fit with our view that the economy is headed into recession. There are now more reasons for the RBNZ to take a dovish tilt next week on August 17. Here is some of the recent data from New Zealand: New Zealand business PMI This missed expectations and fell into the contractionary territory of 49.7 down from the forecast reading of 54. This supported the negative outlook from BNZ’s head of research after the survey of business opinion. New Zealand labour data The unemployment rate was up to the highest estimate at 3.3%. The QoQ change was down to 0% from 0.4% expected and the participation rate fell too at 70.8% vs 71% expected. New Zealand electronic card spending The New Zealand consumer was spending less with retail card spending down y/y in July to -0.5% vs 0.8% expected and down from 2.9% prior. Goldman Sachs sees recession risk for New Zealand Goldman’s model sees a 30-35% chance of a New Zealand recession with a sharp US downturn increasing that to 50-60%. So, although the RBNZ is expected to hike by 50 bps on Wednesday, 17th August, the RBNZ seems likely to mention the slowing growth metrics. One ray of hope has come from the last ANZ business confidence print of -56.7, which was better than the -65 expected. However, the report by itself may not be enough to allow the RBNZ to ignore slowing growth data. NZD data The best opportunities will likely come from this situation: 1. If the RBNZ only hikes by 25 bps and stresses slowing growth concerns then look for the following likely reactions: NZD selling AUDNZD buying 2. If the RBNZ hikes by 50bps (as expected), but stresses slowing growth and rising recession risks then expect the following likely reactions: NZD selling AUDNZD buying The main risk to this outlook would be an unexpected reaction to the announcement. Also, be aware that sentiment can change very quickly, so always manage risk carefully. Learn more about HYCM

Gold closed the fourth straight week in positive territory. Despite the soft US inflation data, the greenback managed to stage a recovery. XAU/USD needs to flip $1,800 into support to target $1,830. Gold started the week on a bullish note and climbed above $1,800 for the first time since early July mid-week before losing its traction. With the dollar staying surprisingly resilient against its rivals despite the soft inflation data, XAU/USD stayed under modest bearish pressure in the second half of the week. The Federal Reserve will release its July policy meeting minutes next week and market participants will look for fresh clues regarding the size of the US central bank’s next rate increase. What happened last week? The dollar rally that was fueled by the impressive jobs report on Friday lost its steam at the beginning of the week as investors booked their profits ahead of the highly-anticipated US inflation data. Gold gained nearly 1% on Monday and closed the day near $1,790. In an appearance before the Kansas Bankers Association over the weekend, Fed Governor Michelle Bowman said that she strongly supports super-sized rate increases to fight inflation but market participants refrained from further betting on a 75 basis points September hike.  With the trading action remaining subdued on Tuesday, gold managed to continue to push higher toward $1,800 amid retreating US Treasury bond yields. The data from the US revealed that the Unit Labor Costs rose by 10.8% in the second quarter, above the market expectation of 9.5%. The US Bureau of Labor Statistics reported on Wednesday that inflation in the US, as measured by the Consumer Price Index (CPI), declined to 8.5% on a yearly basis in July from 9.1% in June. Additionally, Core CPI, which excludes volatile food and energy prices, remained unchanged at 5.9%, falling short of analysts’ estimate of 6.1%. With the initial market reaction, the dollar came under heavy selling pressure and gold touched its highest level in a month above $1,800. According to the CME Group FedWatch Tool, the probability of a 75 bps Fed rate hike in September dropped to 30% from 70% ahead of the CPI data release. In turn, the benchmark 10-year US Treasury bond yield fell as much as 4%, fueling XAU/USD’s rally. FOMC policymakers, however, reminded markets that they will not overreact to a single inflation data. Minneapolis Fed President Neel Kashkari and San Francisco Fed President Mary Daly both noted that they were still far away from declaring victory on inflation. On a hawkish note, Chicago Fed President Charles Evans said that the Fed was not finished with rate hikes and added that he was expecting the fed funds rate to top out at 4%. Following these comments, the odds of a 50 bps September rate increase declined below 60% on Thursday, causing gold to pull away from monthly highs toward $1,790. In an interview with Bloomberg late Thursday, Daly acknowledged that she was keeping an open mind about a 75 bps rate hike in September. The USD staged a rebound on Friday and forced XAU/USD to stay on the back foot. Finally, the University of Michigan's Consumer Sentiment Survey for August revealed that the long-run inflation outlook edged higher to 3% from 2.9%. This data helped the dollar continue to outperform its rivals and capped gold's upside ahead of the weekend.  Next week Retail Sales data from China will be looked upon for fresh impetus at the beginning of the week. Investors expect sales to rise by 5% on a yearly basis in July following June’s increase of 3.1%. Although the impact of this data on gold’s valuation is likely to remain short-lived, a weaker-than-expected print could weigh on the risk sentiment and drag XAU/USD lower by providing a boost to the dollar and vice versa. On Tuesday, Building Permits and Housing Starts data for July will be featured in the US economic docket. The real estate market is under pressure amid rising mortgage rates and investors grow increasingly concerned about a possible housing crisis. Hence, a sharp decline in Housing Starts could trigger a flight to safety and help the dollar gather strength. The US Census Bureau will release the Retail Sales data for July and the FOMC will publish the minutes of its July policy meeting. The publication is likely to reaffirm that policymakers will continue to watch the data before committing to a specific size of a rate increase in September. If the minutes show that the Fed sees a heightened risk of recession, the greenback could lose interest and open the door for a leg higher in gold. On the other hand, investors could reassess the Fed’s rate outlook in case they are convinced that the Fed will stay on an aggressive tightening path until they see consecutive drops in...

The Consumer Sentiment is expected to have improved further in August.  Market players turned optimistic amid signs of receding US inflation.  USD will likely react to sentiment instead of to the Michigan report. The Michigan Consumer Sentiment Index is expected to have improved further in August after plummeting to a record low of 50 in June 2022. It managed to bounce to 51.1 in July, a  figure later revised to 51.5. Market analysts are expecting this August’s preliminary estimate to print at 52.5. Such an improvement should add to the ongoing relief brought by US inflation figures. Inflation eases, optimism raises  Last month, and according to the aforementioned survey, consumers were worried about the falling standard of living due to continued price pressures. At the same time, inflation expectations cooled in July, somehow confirmed by the Consumer Price Index, which remained flat in the month, and increased by 8.5% YoY, much better than the previous 9.5%. Expectations that inflation has begun subsiding will likely boost consumption, moreover considering that the Federal Reserve is now seen decelerating its pace of quantitative tightening. The downside is that inflation would need to shrink at least for two more months in a row to confirm a top and that the US is technically in a recession. The fact that the Fed may no longer need to hike rates aggressively takes some steam off growth pressures. Possible USD reactions to the news The effects of upbeat US data would take some time to show in households, but it is quickly reflected in financial markets.  Upbeat confidence will do more good than the bad a soft number can do. Still, the report will affect sentiment, with the latter providing direction to the greenback. A better-than-expected reading should further underpin Wall Street and weigh on the American currency, particularly against high-yielding rivals. The opposite case scenario has a few chances of hitting equities but could force some profit-taking ahead of the weekend. US indexes may then retreat from their highs and help the greenback to trim some of its recent losses. In a weakening dollar scenario, the AUD/USD pair seems to be the one with better chances of rallying.  The pair has finally taken over the 61.8% retracement of its June/July decline at 0.7050, and as long as the level holds, there’s room for a complete retracement towards the top of the range at 0.7282. Below the mentioned support, on the other hand, could result in a slide towards the next Fibonacci support at 0.6980. 

European markets finished at their highest level in 2 months yesterday after US CPI surprised to the downside, and oil flows in the southern part of the Druzhba pipeline restarted after being closed down at the end of last week.   US markets also underwent a strong session with the Nasdaq 100 leading the way higher, after US CPI fell to 8.5% in July, while core prices remained steady at 5.9%, a trend that has continued with strong gains in Asia markets, which look set to translate into a higher European open. The bigger than expected fall in the headline number, along with the weaker than expected core reading, has prompted the hope that the Federal Reserve may not need to be as aggressive on rate hikes when it meets to raise rates in September. Consequently, rate rise expectations have fallen from 75bps to 50bps, prompting a decline in US 2-year yields, though some of the fall in yields was pared back after Chicago Fed President Charles Evans played down the importance of a single CPI reading. He said he still expects to see the Fed Funds rate at 3.75% to 4% by the end of 2023. By contrast Minneapolis Fed President Neel Kashkari wants to see the Fed Funds rate at 3.9% by year end, and 4.4% by the end of 2023.  In essence the Federal Reserve is likely to want to see further evidence of an inflation slowdown, and even then, they will also want to see it fall back to half the level it is now. This would suggest that any talk of rate cuts is premature, and in all likelihood for the rest of this year. Ultimately any slowdown in inflationary pressures needs to be viewed through a prism of whether we see rate hikes of 50bps or slower, post the September meeting. To that end with recent weakness in prices paid data pointing to a similar slowdown in inflation, todays PPI numbers, which tend to be more forward looking are likely to be as important, if not more so when it comes to what’s coming from the next CPI number, which comes during the Fed blackout period, just before the September meeting. In June US PPI unexpectedly jumped back to 11.3%, raising concerns that further inflationary pressure was building up in US supply chains. This jump in headline PPI was unexpected given that there had been little indication of such upward pressure in the equivalent prices paid numbers for the same month. This downward trend was repeated for the same prices paid numbers in July. Unlike the headline numbers, core prices continued to fall away from their March peaks in June and it is expected this will continue in today’s July numbers. Excluding food and energy, prices fell from 8.5% to 8.2% in June with the hope that this wider trend can continue into July, with an expectation of a fall to 7.7%. There is some evidence that the June spike may have been a one-off given the sharp falls in prices paid numbers over the past two months. Expectations are for headline PPI to fall back to 10.3%, from 11.3%. The wider question for investors and markets in general is how much more can prices fall before finding a floor. This is the more important question when it comes to inflationary pressures. Where is the new neutral rate, given its highly unlikely to be at 2.5% which is where Fed chair Jay Powell seems to think it is. Weekly jobless claims are expected to continue rising in the latest numbers due to be released at the same time with 265k, up from 260k.   EUR/USD – Snapped up to 1.0370 and the 50-day MA before slipping back, thus keeping the downtrend intact the January highs. Pullbacks are now likely to find support around the 1.0270/80 area which acted as resistance through the middle part of July. Below 1.0260 targets 1.0150  GBP/USD – Tested the neckline of possible inverse H&S formation at 1.2280. A break through 1.2300 targets a move towards 1.2600. Interim support at the lows this week at 1.2030 and the 1.1980 area. EUR/GBP – Failed at the 0.8480 area, sliding back towards the 0.8400 area. Below 0.8400 targets the 0.8340 area.    USD/JPY – Having failed at the 135.60 area, we slid back below the 134.20 area, and cleared out a move towards 132.00. The next key support lies at cloud support at 131.60, with a close below here targeting the 130.20 area, and the lows this month.  FTSE 100 is expected to open unchanged at 7,507. DAX is expected to open 78 points higher at 13,779. CAC40 is expected to open 32 points higher at 6,555.

EUR/USD - 1.0301 As euro's recent daily choppy swings from August's 1.0293 high had ended with Wednesday's jump to a 5-week peak of 1.0368 after softer-than-expected U.S. CPI, suggesting rise from July's 20-year 0.9953 bottom would head towards 1.0418 before prospect of a strong retreat later. On the downside, only a daily close below 1.0265/70 would indicate a temporary top is in place and risk stronger retracement towards 1.0247, then 1.0203. Data to be released on Thursday U.K. RICS housing price balance, Japan market holiday, Australia consumer inflation experience, U.S. initial jobless claims, continuing jobless claims and PPI.