Risk conditions will continue to have an important impact during the week with all eyes still on North Korea.  If North Korean tensions ease slightly, there will be scope for a retreat in the yen and Swiss franc while any further increase in fear would trigger further demand for these two currencies.

Investors will also need to be very aware of the fact that trading volumes will remain much lower than normal during the week due to summer holidays in the US and Europe. This lack of liquidity maintains the risk of high volatility and erratic currency moves.

There is scope for fear to ease slightly, but complacency is certainly a clear danger.

US

As far as US data is concerned, the main focus will be on Tuesday’s retail sales release. The data has been generally weaker than expected over the past few months and there will need to be a strong recovery to bolster underlying confidence in the outlook for consumer spending.

Minutes from July’s Federal Reserve Policy Meeting will be released on Wednesday. Principal attention will be on whether there are hints over September’s policy meeting. In particular, there will be a focus on the potential for a move to start shrinking the Balance Sheet in September.

What is the Fed’s balance sheet?

After the 2008 financial crisis, the Federal Reserve bought US government bonds in the open market in order to put downward pressure on interest rates and support the economy.

These bonds were bought by creating money and these securities are now held by the Federal Reserve. With the economy now on a stronger footing, the Fed is looking to start reducing the amount of securities that it holds. This would be a further move towards more normal market conditions.

Fed Balance sheet – technical details

UK

The latest UK CPI inflation data will be the most important release of the week. The Bank of England left interest rates on hold at the August policy meeting and made no changes to the inflation forecasts. An increase in the inflation rate would increase pressure for the central bank to raise interest rates.

The latest labour-market data will be released on Wednesday with the retail sales release on Thursday.

Will there be a Sterling impact?

Markets are assuming that the Bank of England will be very cautious in raising interest rates. There will need to be very strong inflation and earnings releases to trigger a significant reassessment of sentiment and a notable Sterling recovery.

Nevertheless, investors needing to sell Euros against Sterling over the next 2-3 months should start to look for opportunities to take protection against a sharp Euro correction weaker by considering a forward contract.

Euro-zone

The latest ECB monetary policy minutes will be released on Thursday although Euro-zone developments overall are likely to be limited with the peak holiday season still the main feature.

Attention will start to focus on very important speeches from ECB President Draghi due the following week.

International

The Canadian inflation data will be released on Friday along with the retail sales data which will have a significant impact on interest rate expectations and the currency, especially after the Bank of Canada increased interest rates by 0.25% to 0.75%.

Forecasts

Proposed reading:

• More recent news
• 2017 Economic Calendar
• Today’s Foreign Exchange Rates

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