The key event of last week was as expected the Jackson Hole conference of central bankers.

Powell's generally dovish speech sent most major currency higher against the US dollar, as it suggested that the Fed Chair remains unconcerned by the recent spike in inflation and is in no hurry to remove accommodation, let alone raise rates. Risk assets rose in response, led as usual by equities and commodities, the dollar fell and emerging market currencies benefited.

While the tone of Powell's speech was undoubtedly dovish, it did validate market expectations that the tapering of purchases of securities by the Fed will start before year end. The timing and speed of this taper will be driven by inflation and job market data and the internal debate within the Fed, which we expect will become more heated soon. This week's US payroll report will be the key to the outcome of the September FOMC meeting. Also critical will be the flash inflation number out of the Eurozone Tuesday.

GBP

PMI business activity numbers were disappointing, especially in the services sector. However, markets took this in stride, and consensus seems to be that high vaccination and past COVID positives in the UK render it more resilient to the Delta variant. Little economic or policy news of note is on tap for this week, so Sterling will probably trade in line with the Euro against the uS dollar.

EUR

Strong PMI numbers out of the Eurozone confirmed our view that the economy there remains resilient and the Delta variant is having so far limited impact in the booming recovery. We expect to see a lagged version of the inflationary tensions manifest in the US, driven by energy prices and supply-chain disruptions. The flash inflation number for August out Tuesday could top 4%, a multi-decade high, although it will be hard to differentiate one-off effects like the expiration of German VAT cuts, from genuine cost pressures.

USD

While Powell's communication tone remains dovish, other FOMC members seem to be taking a less relaxed view of the unbalance between supply and demand and resulting inflationary pressures. The announcement of a taper of Treasuries is now a matter of time, and hence every inflation and job market data point takes added importance. Consequently, the key event for currency markets this week will be the August payroll report, where another strong month of job creation and a drop in the unemployment rate is expected.

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