FX168 Financial News (Asia Pacific) News After this week's August non-agricultural report, which was slightly lower than expected, the market will welcome key CPI data next week, which has a key guiding effect on the extent of the Federal Reserve's interest rate cut in September. In addition to this, the market is also concerned about the ECB's interest rate decision and China's series of economic data.

The ECB will cut interest rates for the second time

The ECB's interest rate cut cycle seemed a bit awkward when it began in June, because the sudden data changes left policymakers with no choice but to push ahead with the planned 25 basis point rate cut and present it as a “hawkish interest rate cut.”

Fortunately for dovish and struggling European companies, the reasons for further policy relaxation have strengthened since the last meeting in July, when interest rates remained unchanged. The overall inflation rate fell to 2.2% year on year in August, and the Eurozone's growth rebound was also relatively weak.

The current economic context may have laid the foundation for the ECB to lower quarterly inflation and GDP forecasts, which will be announced on Thursday's meeting day. More importantly, ECB President Christine Lagarde may now reduce her emphasis on “data dependency and meeting-by-meeting decisions” and confidently point to further interest rate cuts in the future.

One problem, however, is that the service sector CPI rose to 4.2% in August, the highest value since October 2023. While that wasn't enough to stop the ECB from taking a more dovish stance at the September meeting, Lagarde is likely to remain somewhat cautious during the press conference.

If Lagarde suggests that the path of interest rate cuts is not as far-reaching as investors expected, the euro may resume an upward trend, which previously suffered a setback due to the strengthening of the dollar.

Will the US CPI support a 50 basis point interest rate cut?

The dollar has been fluctuating recently because there is uncertainty about whether the Federal Reserve will cut interest rates by 25 basis points or 50 basis points at the upcoming meeting. The Federal Reserve's long-awaited policy shift was finally revealed at the Jackson Hole annual meeting in August.

Federal Reserve Chairman Powell acknowledged that cracks are beginning to appear in the labor market, which opens the door for a possible 50 basis point rate cut in September. Most reviews since then have not supported more aggressive action, as the data is mostly robust.

The key question is, the biggest question is, to what extent will the Federal Reserve prioritize employment tasks over price stability when the risk of upward inflation still exists? The American Institute of Supply Management's price index for both manufacturing and service industries rose slightly in August, but the number of employed people in the former shrank, while the latter showed little growth.

Wednesday's CPI report will be the last piece of the puzzle before the September decision, and should bring some clarity to expectations. The overall CPI fell to 2.9% year on year in July, and is expected to fall again to 2.6% in August. However, the core inflation rate is expected to remain unchanged at 3.2%. If these data are confirmed, the Federal Reserve is more likely to adopt a “dovish interest rate cut” of 25 basis points. However, for the real possibility of cutting interest rates by 50 basis points, a major downside event must occur.

Investors currently expect that the probability of cutting interest rates by 50 basis points is close to 40%, so if the CPI data is in line with expectations or stronger, it may disappoint the market and push the dollar higher.

The producer price index will be released on Thursday, and the University of Michigan's preliminary consumer confidence survey on Friday is also very important, especially for inflation expectations for one to five years.

Bank of England decision nears

The Bank of England is expected to go against the central bank trend in September and keep interest rates unchanged at the 19th meeting. In the first half of 2024, the UK economy rebounded strongly, wage growth and service sector inflation were still high, and the Bank of England could stay on hold for the time being after cutting interest rates for the first time in August.

However, according to a series of data to be released before the September meeting, the final decision may be much closer than expected. On Tuesday, the July employment report will be in the spotlight, looking for signs of stability in the UK labour market after significant unemployment at the beginning of the year.

The UK unemployment rate fell 0.2 percentage points to 4.2% in June, but a sharp drop may not be welcome, as wage growth is finally starting to trend more in line with the 2% inflation target. A rebound in employment growth is likely to push wage pressure once again and hinder the Bank of England's anti-inflation efforts.

Wednesday's focus will be on July's GDP data, including service and manufacturing segments.

Currently, the market expects the probability that the UK will stay on hold in September is about 75%, but if next week's data does not perform well, it may increase the possibility of cutting interest rates by 25 basis points, and the pound may be under heavy pressure.

Focus on Asia at the beginning of the week

As concerns about China's economic weakness persist, Monday's CPI and PPI data, followed by Tuesday's August trade data, may draw investors' attention to risk-sensitive currencies such as the Australian dollar. China's exports have rebounded strongly in recent months. Another strong data for August may boost risk appetite in the short term, but it has little impact on the overall pessimism about China's economic outlook.

In Japan, next week will be a data-intensive week, with the highlight being Monday's revised GDP data. GDP growth in the second quarter is expected to rise from an initial 0.8%. If the data is higher than expected, it may strengthen market expectations that the Bank of Japan will raise interest rates again this year and push the yen to continue to rise.