Markets still coming to terms with China devaluation this week

Market sentiment has been rocked hugely by the shock decision of the People’s Bank of China to devalue the yuan last week. The move is twofold, helping to liberalise the currency in preparation for potentially making it into the basket of the International Monetary Fund’s basket of Special Drawing Rights, but also will help China to benefit in the wake of ongoing economic slowdown. The move has had a significant impact across financial markets, with the US dollar less bullish than it has been in recent weeks. This is due to the potentially deflationary impact of the move by the PBoC and the impact that this could have on the Federal Reserve’s decision on whether to start to raise interest rates or not. All eyes will be on the Jackson Hole Economic Symposium at the end of the week for any sign from FOMC member of a potential move. This comes as there are signs of corrections on forex majors, a rally on gold and equity markets have come under huge pressure. The China slowdown is having an ongoing impact on commodity prices and equity markets that have sizeable weighting to these markets are under pressure.  The economic calendar this week is showing that early focus will be on inflation data for the UK and US. This is likely to drive volatility on Cable as these releases are likely to play in to give further signs of when the respective central banks could start to increase interest rates. The FOMC meeting minutes will always come under scrutiny ahead of Jackson Hole. The calendar also shows that the forward looking flash manufacturing PMI data on Friday is likely to drive volatility across markets as risk appetite will be affected. Expect a lot of commodity price volatility around these releases too.

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