Week of August 4

A busy week of events saw the FOMC give a hawkish hold, the BOC and BOJ hold, and US Q2 GDP surprise to the upside ahead of the Eurozone CPI and US NFP.

The week ahead has a relatively calmer economic calendar, with major events expected, including China's trade balance and the BOE's rate decision.

Week in Review

Despite a heavy economic calendar, markets were significantly influenced by geopolitical events. The US-EU announced a trade deal at the start of the week, sending risk appetite soaring. Then, on Friday, the White House disclosed a list of tariffs that would be unilaterally applied to countries that had not reached trade deals, leaving the markets red across the board.

The major event on the economic calendar was the FOMC rate decision, which kept policy unchanged, as was widely expected. However, the hawkish tone from the statement and Fed Chair Jerome Powell caught the market by surprise, with the odds of a rate cut for September being trimmed down. In an unusual move, two FOMC members dissented and voted to cut rates by 25bps. The US advance Q2 GDP came in at 3.0%, above the 2.6% expected, as imports fell by 30.3% compared to +37.9% in Q1, due to the trade war. The Fed's preferred inflation measure, the core PCE price index, came in at 2.6% annual compared to 2.5% expected.

As anticipated, the BOJ kept rates unchanged for the fourth consecutive time and signalled its openness to further rate hikes if the conditions were warranted. The BOJ's quarterly outlook raised its projections for CPI growth to 2.7% from 2.2%. However, dollar strength prevailed, with the USDJPY pair crossing the 200-day moving average near 150.00 after several months. 

The BOC kept rates on hold for the third time in a row, as was widely expected, but suggested that weakness in the economy could mean it will resume rate cuts. The bank forecasted that the Canadian economy would rebound in the third quarter. Still, USDCAD recorded its 7th consecutive session in green, exposing the 1.4000 handle while trading above 1.3800.

The Euro Area's advance Q2 GDP reading was ahead of expectations with an annual growth rate of 1.4% compared to the 1.2% forecast. Flash Eurozone July CPI was in line with expectations at 2.0%, and so was the core at 2.3%.

A strong earthquake struck off the eastern coast of Russia, the eighth most powerful ever recorded, sending a tsunami wave across the Pacific that briefly closed ports but without inflicting any significant damage.

US President Donald Trump reduced the deadline he had given to find a peace deal in Ukraine to 10 days, threatening secondary sanctions on Russian oil.

Biggest Market Movers

• Optimism around trade deals left the dollar gaining against its peers through the week, with gold losing the 50-day moving average.
• The euro crashed 3% in the wake of the trade deal that imposes tariffs on EU imports to the US.
• US indices hit record highs in the first half of the week, with the Nasdaq powering higher on strong tech earnings, but tariff announcements on Thursday provoked a reversal.

Top Events in the Week Ahead

A quieter week in terms of economic releases could put geopolitics back to the forefront as markets adjust to the aftermath of the tariff deadline and wait for more trade deals.

BOE to Cut but Split Vote

The BOE is expected to cut rates by 25 bps on Thursday, in line with its gradual easing policy. The focus will likely be on the vote split, with the possibility of dissenters voting for a larger cut seen as dovish. If the dissent is to hold rates unchanged, then it could be viewed as hawkish. However, given recent economic data, traders might worry that the BOE's restrictive policy could weaken the pound. Below 1.3400 and the 1.3200 handle, all eyes turn to the 200-day moving average near 1.3000.

China Trade Surplus Despite Tariffs

China's trade balance is scheduled to come out on Thursday and is expected to show that exports increased by over 5% once again. Imports are seen growing at just 1.3% and contribute to a trade surplus of $111 billion, slightly lower than the $117.8 billion from a month earlier.

Other Events, Earnings

Monday has the Swiss inflation rate. Tuesday sees the Canadian trade balance. New Zealand labour data comes out on Wednesday. Thursday includes Australian and German trade balances. For Friday, Canadian jobs data is expected.

Earnings season is past its peak, with notable names expected to report, such as Palantir, BP, AMD, Caterpillar, Novo Nordisk, McDonald's, Walt Disney, Uber, WPP, Eli Lilly, and Lamar.