Week Ahead: FOMC Minutes, UK Inflation and Eurozone PMIs

Last week was relatively quiet, with the U.S. dollar holding more or less flat, as did the S&P 500, amid a lighter earnings calendar.

Despite U.S. inflation cooling and markets reining in hawkish Fed expectations for September, there was little follow-through in risk assets. Concerns over the Middle East, a 5% rise in oil prices, and continued uncertainty around the Strait of Hormuz offset some of the optimism from the softer inflation data.

FOMC Minutes

Looking ahead to this week, the economic calendar is noticeably quieter. The main event will likely be Wednesday's release of the FOMC minutes, which could provide more insight into the debate within the Federal Reserve.

The minutes come from the July meeting where the Fed left interest rates unchanged, although three policymakers dissented in favour of a rate hike. Federal Reserve Chair Kevin Warsh also reiterated the Fed's commitment to bringing inflation back towards its 2% target, but gave little detail on how the central bank intends to achieve it, leaving the market confused.

Since the meeting, the data has been relatively supportive of keeping rates unchanged. U.S. inflation cooled to 3.4% in July, while PPI eased to 4.7%. However, oil prices rose 20% in July, and ongoing uncertainty around the Strait of Hormuz means higher energy prices could still feed back into inflation.

The minutes will therefore be useful in showing how concerned policymakers are about the inflation outlook, particularly with the Jackson Hole symposium approaching. Warsh could use the event to signal whether a September hike remains on the table, or to outline his priorities for monetary policy over his term.

Given the recent reassessment of rate hike expectations for the September meeting and owing to the summer lull, these minutes could be more market-moving than usual. A more hawkish sounding committee could lift the USD and treasury yields while weighing on Gold and stocks such as the S&P 500, which reached a record high last week. A less hawkish FOMC could support stocks and Gold higher.

UK Data

Markets will watch several key UK releases this week, including July CPI and PPI inflation, July retail sales, and preliminary August PMI figures.

UK CPI on Wednesday will be the most keenly watched release. Expectations are for CPI to rise 0.4% MoM in July, up from 0.1% in June, with a 2.9% rise annually, up from 2.6%. Core inflation is forecast to cool to 2.5% from 2.6%.

The next BoE meeting is on September 17, with no change in rates expected until a hike towards the end of the year. Hotter-than-expected data could increase expectations for a BoE rate hike, which could support GBP/USD particularly if the Federal Reserve continues to appear cautious about raising rates.

On the other hand, cooler or in-line inflation could reduce the pressure on the BoE to tighten policy and limit the upside for GBP/USD, which has struggled to break above 1.3550. A rise above here is needed to bring 1.36 into focus.

Eurozone PMI Data

EUR/USD has gained more than 1.5% over the past three weeks, although much of the move has been driven by U.S. dollar weakness rather than strong euro-specific catalysts.

The euro has also found some support from expectations of a September ECB rate hike. Beyond that, however, the bullish case is less convincing.

Attention this week will turn to Eurozone PMI figures, which could test the recent euro rally.

The Eurozone economy showed signs of improving in July, with business activity returning to growth for the first time in 4 months. However, renewed conflict in the Middle East could derail this, as energy prices have risen over 20% in the past 6-weeks. If the PMI data points to weaker growth, it could raise questions about whether the ECB can press ahead and continue hiking interest rates.

However, energy prices complicate the picture. If Eurozone growth remains weak but Middle East tensions keep oil prices elevated, the ECB could still face pressure to raise rates because of renewed inflation risks.

On the other hand, any progress towards reopening the Strait of Hormuz, combined with weaker Eurozone data, could strengthen the case for ECB policymakers to remain cautious and put further pressure on the euro.