Week Ahead: Oil, Tech Earnings and ECB Take Centre Stage

Last week was mixed across financial markets, with investors focused on the U.S. dollar, oil and U.S. equities.

The USD ended the week modestly lower as softer-than-expected CPI and PPI data earlier in the month outweighed hawkish Federal Reserve commentary and safe-haven demand linked to renewed U.S.-Iran tensions and growing concerns over AI valuations. Tech stocks underperformed, and Gold fell 2.5%.

Middle East uncertainty to continue

Military hostilities between the U.S. and Iran, together with a sharp reduction in tanker traffic through the Strait of Hormuz reignited concerns over global oil supplies last week. Oil prices surged more than 15% over the week.

With further strikes reported over the weekend, developments in the Middle East are likely to remain the dominant macro driver. Continued disruption to shipping through the Strait of Hormuz, combined with the risk that Houthi forces could target traffic through the Bab el-Mandeb Strait, could push oil prices higher still, bringing $95 and potentially $100 into focus.

Higher oil prices also risk reviving inflationary fears, strengthening the case for central banks to keep rates high for longer. That could support the USD while weighing further on non-yielding gold.

Will US tech earnings calm AI jitters?

U.S. earnings season ramps up this week, with technology firmly in focus as Alphabet, Tesla and Intel all report earnings.

The results come amid increasing concerns surrounding the AI trade - valuations, rising capital expenditure, and the timetable for generating returns. These jitters prompted a 3% sell-off in the tech-heavy Nasdaq last week, led lower by semiconductor stocks. 

Investors will be looking for reassurance surrounding the AI trade. Strong earnings, encouraging guidance and continued confidence in AI spending could help stabilise sentiment and support a rebound in tech shares. However, the bar remains high, and any disappointment or signs that returns on AI investment are taking longer to materialise could see the recent sell-off deepen, extending the Nasdaq's breakdown from its symmetrical triangle pattern beyond the 28,200 June low.

Europe – ECB rate decision and PMI Data

While the euro benefited from a weaker U.S. dollar last week, EUR/USD remains broadly unchanged so far this month after falling around 2% in June.

Attention now turns to this week's ECB policy meeting and Friday's eurozone PMI data.

The ECB is widely expected to leave interest rates unchanged at 2.25%. However, investors will watch for any signs that the central bank remains on course for a September rate hike.

While softer CPI data earlier this month lowered hawkish ECB expectations, the recent surge in oil prices has revived inflationary concerns. A hawkish tone from ECB President Christine Lagarde could cement expectations of a September hike and support EUR/USD towards 1.15. 

Separately, any improvement in the PMI data would suggest economic activity is stabilising after recent weakness and could provide additional support for the euro.

UK Politics and a Busy Data Calendar

The UK begins a new political chapter on Monday as Andy Burnham replaces Keir Starmer as Prime Minister.

Markets will focus on the announcement of the new Cabinet, particularly whether Shabana Mahmood is confirmed as Chancellor. She is viewed as fiscally disciplined, and her appointment could help reassure gilt markets and the pound.

However, uncertainty surrounding Burnham's broader economic agenda, including government spending plans and how they will be funded, could limit sterling's upside over the medium term.

It is also a busy week for UK economic data. CPI is expected to ease to 2.4%, while the unemployment rate is forecast to remain unchanged at 4.9%. Retail sales could surprise to the upside, supported by warmer weather and increased consumer spending during the World Cup.

Canada and Japan Inflation

Inflation data from Canada and Japan will be released. Both the Canadian dollar and the Japanese yen benefited from broad U.S. dollar weakness last week.

However, after the BoC failed to reinforce expectations of further policy tightening last week, a softer Canadian CPI report could support USD/CAD higher.

Japanese inflation is expected to accelerate to 1.7%. A hotter-than-expected reading could reinforce  BoJ tightening expectations, supporting the yen and pulling USD/JPY further away from the 162 level, easing intervention fears.