This week, the spotlight is firmly on the US dollar, buoyed by a remarkable surge in Durable Goods Orders and the ongoing reverberations from Federal Reserve Chairman Jerome Powell's speech at Jackson Hole. The US currency has started the week on a strong note, recovering from last week's losses, which saw the US Dollar Index drop by more than 1.5%. The turnaround can largely be attributed to the unexpectedly robust Durable Goods Orders for July, which surged by an eye-popping 9.9%. This figure far exceeded market expectations and effectively overshadowed a significant downward revision of the previous month’s data:

From a broader perspective, Powell’s recent remarks at the Jackson Hole Symposium have added more uncertainty to the USD's trajectory. While he hinted at the need for policy adjustments, he stopped short of outlining a clear path for interest rate cuts. Instead, Powell emphasized a data-driven approach, underscoring the importance of incoming economic indicators in guiding future decisions. His caution reflects growing concerns over labor market softening, even as inflationary pressures appear to be easing. 

In this context, traders should keep a close watch on the upcoming US core Personal Consumption Expenditure Price Index data. Scheduled for release on Friday, this report is a crucial gauge of inflation that the Fed closely monitors. A steady month-over-month increase of 0.2% is anticipated, but any surprises here could trigger significant volatility in the USD. 

Moreover, market sentiment, as reflected in the overnight index swaps in the US, suggests that there is a 62% probability of a 25 basis point rate cut by the Fed in September. However, the chances of a more aggressive 50 bps cut are not negligible, standing at 38.5%. Should the data continue to favor a softer inflation outlook, we might see an increase in speculation around a deeper cut, potentially influencing USD performance. 

Meanwhile, the British currency has been holding its ground strongly against its major peers. This strength comes despite a general expectation that the BoE might resort to further rate cuts before the year ends. The BoE’s hesitance to commit to a fixed rate-cutting path stems from the fact that inflationary pressures in the UK remain a persistent concern. This cautious approach is mirrored in the tight 5-4 vote split seen in the Monetary Policy Committee's last decision:

For traders, the absence of significant UK economic data releases this week means that the pound's movement will be largely driven by market sentiment and speculation regarding the BoE’s future actions. With one rate cut already behind us, and more likely on the horizon, the GBP could see increased volatility as investors react to any new data or shifts in the BoE's tone. 

Interestingly, the recent string of positive UK economic data, particularly the stronger-than-expected flash S&P Global/CIPS PMI for August, has somewhat tempered expectations of an imminent rate cut. However, this remains a fluid situation, and traders should be prepared for sharp moves in the GBP as the week progresses.