Week Ahead USD on Retreat Ahead of Central Bank Summit

The Jackson Hole Symposium will focus on how to build monetary policy for the future

The U.S. dollar has depreciated across the board after mixed comments from Fed members and the release of the Federal Open Market Committee (FOMC) July minutes showed that even though some members are in favor of a rate hike, they are a minority. The market is pricing the probability of a rate hike at 18 percent in September according to the CME FedWatch tool.

USD weakness gave way to a rise in the GBP. The British pound gained on strong retail sales data this week, but is still facing post-Brexit vote pressure as speculation grows that Theresa May’s government will invoke Article 50 in the first half of 2017. Oil appreciated more than 8 percent as U.S. crude inventories had a surprise drop. Organization of the Petroleum Exporting Countries (OPEC) members have signalled that an oil output freeze will be discussed at the end of September aiming to reduce the rate of crude supply.

The Fed minutes released on Wednesday gave few insights into the next move of the U.S. central bank other than highlight the division between members about what that next step may be. The Kansas City Fed will be hosting the Jackson Hole Summit that starts on Friday, August 26. Fed Chair Yellen will be in attendance unlike last year, and her talk will be monitored by investors looking for some clarity on the rates debate within the central bank.

The EUR/USD gained 1.377 in the last week. The single currency is trading at 1.13 as the USD continues to lose ground after the release of the minutes from the July FOMC. The probability of a rate hike in September is now at 18 percent but comments such as those from San Francisco Fed President Williams have raised further doubts that the central bank will raise this year at all. Inflation in America has been tame as consumer prices have remained unchanged and employment although the strongest pillar of the U.S. recovery has little upside left.

West Texas Oil rose 9.133 percent in the last week. The price of crude is trading at $48.19 following a drawdown in U.S. supplies and continues its August rally after members of the Organization of the Petroleum Exporting Countries (OPEC) and other major energy producers have made comments hinting at an output freeze agreement. The OPEC meeting in Algeria at the end of September is being floated as a possible forum to discuss the matter officially. The oil output freeze had a positive effect earlier in the year when Russia and Saudi floated the idea, but it all came crashing down in the meeting in Doha as the OPEC internally could not commit in full. Oil production has broken output records since then and even a freeze might not be enough to expect higher prices as demand for energy has not grown as much as supply.

On Friday, August 26 will see the release of gross domestic product (GDP) data from the United Kingdom and the United States. This is the second release for both as more data becomes available. Last month the U.K. surprised with a slight gain and the U.S. was a disappointing after a 1.2 percent gain in the second quarter when more than double was expected. The global economy is counting on the U.S. to be the engine of growth that sparks a recovery, but so far it seems bogged down by the same factors that have slowed down other major economies.

Market events to watch this week:

Tuesday, August 23
12:00am JPY BOJ Gov Kuroda Speaks
Wednesday, August 24
10:30am USD Crude Oil Inventories
Thursday, August 25
4:00am EUR German Ifo Business Climate
8:30am USD Core Durable Goods Orders m/m
8:30am USD Unemployment Claims
Friday, August 26
4:30am GBP Second Estimate GDP q/q
8:30am USD Prelim GDP q/q
ALL DAY Jackson Hole Economic Policy Symposium

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza