Week ahead volatility should remain elevated

It is going to be a busy week in the markets, particularly for the pound with the upcoming release of key UK economic data, BoE’s rate decision and perhaps more importantly Brexit-related headlines. As my US colleague Matt Weller highlighted in his report HERE, sterling is becoming more attuned to headlines about the likelihood and structure of a deal. So, when EU'S Barnier was reported as saying earlier that a deal was realistic in 6-8 weeks, the pound surged higher. Indeed, sterling reacted far more significantly to this headline than it did when UK’s GDP data was released earlier this morning, despite it showing a positive surprise. While the pound will likely remain headline-driven and not-so-responsive to data, we may see more straight-forward reaction from other currencies around the time of this week’s upcoming data releases. In addition to the data release, more volatility could result from ongoing trade dispute between the US and her allies and as stock market investors decide whether to buy this most recent dip or stay on the side-lines. So, risk-sensitive assets will be in focus after last week’s big drop.

UK wages, BoE in focus

As mentioned, we’ve already had a stronger UK GDP print and some positive construction and services data today. Tomorrow, we will find out whether wages have had a better showing than the previous few months, when the ONS releases the closely-followed Average Earnings Index, along with some other labour market data. UK earnings, including bonuses, are expected to have risen 2.5% in the three months to July, compared with 2.4% in the previous three-month period. The unemployment rate is seen steady at 4.0%, while the more forward-looking jobless claims data are expected to show a moderate 3,600 increase for the month of August. On Thursday, the Bank of England will likely keep interest rates unchanged at 0.75%, regardless of the jobs data. This is because, the BoE has already hiked interest rates at its last meeting in August. They will want to wait and see what happens with regards to Brexit. Apparently, a deal is realistic in 6-8 weeks, according to the EU'S Barnier.

It not all about the UK

But it is not just the UK that will garner all the market’s attention this week. We will also have, among other things, the ECB’s rate decision on Thursday and important data from the US as well: CPI on Thursday and retail sales a day later on Friday. In addition, we will have plenty of second-tier data from the Europe, including German ZEW Economic Sentiment (Tuesday) and Eurozone Industrial Production (Wednesday), while Australian employment figures will be released on Thursday, followed a day later by Chinese industrial data. This makes the Aussie an important pair to watch towards the end of the week.

US CPI could be most important data this week

Last Friday’s jobs report from the US revealed a sharp pickup in earnings for the month of August. Higher wages means more disposable income for consumers, which usually leads to higher spending and eventually to inflation. It remains to be seen however whether inflation picked up steam last month. But if Thursday’s CPI report does reveal that inflation was already on the rise, then investors’ expectations over future levels of inflation may rise further. This in turn would boost the prospects of even more aggressive tightening from the Federal Reserve, potentially underpinning the dollar further. Conversely, if inflation turns out to be weak, then a dollar correction could be the outcome.