The euro area CPI for August was the main report to shape the sentiment of traders this week. Inflation accelerated to 9.1% in August, beating economists' estimates and hitting a new record high. Commenting on the situation, Bundesbank Chief Joachim Nagel urged the board of directors to take immediate action at its next meeting in order to combat inflation. He advocated for a strong rise in interest rates in September and in the following months.

Expectations of a rate hike continue to grow. The expected rise in September went up by 2 basis points overnight to 67 basis points compared to 44 basis points two weeks ago. The ECB's deposit rate is expected to reach 1.61% by December this year compared to basis points in early August.

The reviewed ADP report on employment change was published yesterday evening and showed that the private sector added 132K new jobs in August, while annual pay was up by 7.6%. The employment rate slowed down considerably compared to almost 270K new jobs recorded in the previous month. Nonfarm Payrolls that are due on Friday are expected to decline as well.

ADP and wage expectations show that the US labor market remains tight. This, in turn, contributes to the Fed's hawkish stance and supports the US dollar.

The outlook for the forex market became clearer after Jerome Powell's speech at the Jackson Hole economic symposium. The Fed is committed to bringing prices down which suggests a longer streak of rate hikes. The US stock market is tumbling. Historically, the Fed paused its tightening cycle when stocks slumped by 10-20%. Today, however, this rule won't work. A decline in stock indices will boost the rise of the US dollar.

Today, markets expect the release of the ISM Manufacturing PMI. The indicator will most likely decline. The same is happening in Asia. Thus, China's Caixin manufacturing PMI dropped to 49.5 in August from 50.4 in July, missing analysts' expectations. Korea's PMI slid even lower to 47.6, while exports slowed down in August. Taiwan's PMI showed the biggest decline to 42.7. So, the threat of the global economic slowdown is getting real. Stagflation is becoming closer each day.

USD/CAD

Canada's GDP grew at an annual rate of 3.3% in the second quarter, which is well below the forecast. The Bank of Canada predicted a rise of 4%. Yet, this data is unlikely to change the policy of the regulator. GDP remains 2% higher compared to pre-pandemic levels.

The Bank of Canada will have to deploy several tools to tackle inflation. Markets expect the regulator to raise the rate by 75 basis points next week. The BoC will use monetary tightening to cap the wage rise and inflationary pressure.

The net long position on CAD decreased by 299 million over the reporting week, according to the CFTC data. The closing price went up above the long-term average, proving the fundamental strength of the US dollar.

USD/CAD is close to the local low of 1.3222 and is very likely to test it. Then, it is set to face the technical resistance at 1.3335 (50% fibo retracement). A downside pullback seems unlikely in the current conditions. A further decline can be used for buying the pair.

USD/JPY

Inflation in Japan is lower than in most countries, standing at only 1.2%, which is way below the 2% target. While the majority of central banks view wage growth as a destabilizing factor that raises inflationary expectations, the Bank of Japan is making efforts to increase household incomes. Consumer demand is under pressure due to demographic problems and shrinking real incomes. So, the BoJ is unlikely to change its monetary policy.

The yen net short position has been rising for the second week in a row and reached -3.547 billion. This is more than half of the April peak. The closing price is again moving above the long-term average. Apparently, USD/JPY is set to advance further.

The yen broke above 137.5, the upper boundary of the range formed last week. The pair has retested the local high. Closing the day above 139.40 will strengthen the bullish bias. The 10-year bond yield is also approaching the 0.250% target. This may lead to interventions from the Bank of Japan, so the yen will continue to weaken. A confident consolidation above 140 is expected.