The long-awaited dovish policy shift of the Federal Reserve is about to come, and the market is preparing to welcome the first interest rate cut of this cycle at the meeting on September 17th to 18th. However, the Fed still largely relies on data, and the decision in September also includes the latest dot plot, so the rate path is far from certain.

Will the personal consumption expenditure inflation disappoint dovish expectations?

Hawkish members of the Federal Open Market Committee still believe that there are some upside risks to inflation, and if the Fed wants to cut interest rates by 100 basis points in 2024, the upcoming data will need to decline significantly.

Therefore, Friday's personal income and outlays report will once again be a focus, which includes consumption data and the crucial Personal Consumption Expenditures (PCE) price index.

The core Personal Consumption Expenditures (PCE) price index remained unchanged in June, at a year-on-year rate of 2.6%, and is expected to stay at this level in July. Overall personal consumption expenditure data is also expected to stabilize at 2.5%.

At the same time, personal consumption is expected to grow healthily by 0.5% month-on-month in July. While this may further alleviate fears of an economic recession, it may weaken hopes for significantly cutting interest rates. However, the expected increase in personal income by only 0.2% may offset concerns about another round of spending by U.S. consumers to some extent.

The U.S. dollar index is set to decline for the fifth consecutive week, but if economic reports turn out to be hotter than expected, the U.S. dollar could easily see a rebound.

The auction of U.S. Treasury bonds, and Nvidia's earnings will be released soon.

Before the release of Personal Consumption Expenditures (PCE) data, July Durable Goods Orders will be released on Monday, and August Consumer Confidence Index will be released on Tuesday. In addition, the GDP growth estimate for the second quarter will be announced on Thursday, and the Chicago PMI will be released on Friday.

The speech by the Federal Reserve will be limited, and investors will have to follow the tone set by Chairman Powell in his speech at Jackson Hole before the data is released next Friday. Despite a large number of U.S. Treasury bond auctions in the coming week, which may stimulate some volatility in the bond market as trading volume picks up from the summer lull.

But in the stock market, traders will also be guided by Nvidia's latest performance, which is scheduled to be released on Wednesday.

The last Eurozone CPI report before the next meeting of the European Central Bank.

The euro to dollar exchange rate has soared this month, breaking through $1.11 for the first time since December last year. Despite strong market expectations that the European Central Bank will cut interest rates again in September, the euro has still risen.

However, despite the strong possibility of a rate hike in September, a small but important risk is that the policymakers at the European Central Bank will not believe it is necessary to cut rates again at that time. The preliminary CPI reading for August, which will be released on Friday, is crucial for giving the green light to further easing measures in September.

The overall inflation rate in the Eurozone is expected to drop from a year-on-year 2.6% in July to 2.3% in August, bringing it closer to the European Central Bank's target of 2%. The core inflation rate, which excludes all volatile items, is expected to decrease slightly to 2.8%.

If inflation data disappoints, it may further push up the euro against the dollar, but it is unlikely to change the market consensus of an interest rate cut in September.

Other data from the euro area will be released on Monday, with the German Ifo business climate index being closely watched, and the Eurozone economic sentiment indicator being released on Thursday.

Tokyo CPI will be a key consideration for the Bank of Japan's next steps.

The yen, or more specifically, the Bank of Japan's dilemma with the US dollar, bears some responsibility. The reality that Japan's long-standing ultra-loose monetary policy is coming to an end has finally touched the nerves of investors. The Bank of Japan raised interest rates in July and announced that it would gradually reduce its asset purchases by half.

The Bank of Japan is very likely to raise interest rates for the third time before the end of the year. Governor Kuroda has hinted that if the economy and inflation remain on a normal track, further rate hikes are possible, although the Bank of Japan is concerned about the current market instability. Therefore, the Tokyo CPI data to be released on Friday will be very important, as it is seen as a prelude to the national CPI data, which will be released much later.

A series of other indicators will be released on Friday, including preliminary industrial production, retail sales, and unemployment rate for July.

The Reserve Bank of Australia hopes to make further progress in inflation.

In Australia, inflation will also be a major theme. Monthly data will be released on Wednesday and will be closely watched as concerns about inflation persist. In June, the CPI annual rate finally fell slightly to 3.8%, after rising in the previous months. However, policymakers at the Reserve Bank of Australia want to see a further decline in the Australian dollar before giving up their hawkish stance.

If there is no progress in July, the Reserve Bank of Australia is almost certain to continue ruling out the possibility of a rate hike this year, which would be favorable for the Australian dollar. The AUD/USD rose nearly 3% in August. However, if the second quarter construction data (Wednesday) and capital expenditure data (Thursday) fall short of expectations, there may be some downside risks.

Is Canadian GDP important for the Bank of Canada's interest rate cuts?

The Bank of Canada is ahead in the interest rate cut race. As Canada's inflation generally aligns with expectations, investors have already priced in a more than 90% possibility of a 25 basis point rate cut in September.

However, stronger-than-expected economic growth may be one of the reasons why policymakers decide not to hold a meeting and focus on the second quarter GDP data to be released on Friday. One day earlier, June wage growth data may also draw some attention to the Canadian dollar.