Week Ahead: US CPI, RBA Rate Decision & UK GDP in Focus

Heading into the new week, the market is weighing up a softer U.S. labour market with still-uncertain inflation risks stemming from the Middle East. Last week's weaker-than-expected non-farm payroll report, coordinated U.S.-Japan intervention to strengthen the yen, and renewed volatility in oil prices have shifted attention firmly towards this week's U.S. CPI report.

The non-farm payroll report showed the U.S. economy lost 23K jobs in July, while June payrolls were downwardly revised to just 20K. The figures point to a labour market that is weakening more quickly than previously thought. However, the unemployment rate unexpectedly fell to 4.1%, its lowest level since June 2025, while the labour force participation rate also dropped to its lowest level since 2021.

The data points to a low-hire, low-fire jobs market and weakens the case for a near-term Fed rate hike. This is reflected in market pricing, with the CME FedWatch tool showing the probability of a September rate hike falling to 43% from 57% before the payroll report.

US CPI

Against this backdrop, attention now turns to U.S. CPI data for July, which will be released on Wednesday. Headline inflation is expected to ease to 3.4%, while core CPI is forecast to slow to 2.5%.

The data comes as inflation still remains the dominant focus for the Fed. Last week's payrolls pushed markets towards a less hawkish outlook, but a stronger inflation print could quickly reverse that shift, particularly if oil prices remain elevated.

While tensions between the U.S. and Iran have eased in recent weeks and oil prices have fallen back, this follows a sharp escalation in hostilities throughout July, which drove energy prices significantly higher. As a result, there could still be upside risks to this week's inflation report.

A hotter-than-expected CPI report could revive expectations for a September Fed rate hike. However, a cooler-than-expected inflation print, combined with last week's weak payrolls report, could further reduce expectations for tighter policy next month.

The CPI report could prove pivotal for USD/JPY, which fell sharply last week following coordinated intervention by the U.S. and Japan. A stronger inflation report could revive hawkish Fed expectations and help USD/JPY recover towards the 160 level, potentially putting authorities in both countries back on intervention watch. Conversely, a softer CPI reading could see the pair fall back towards Friday's low around 156.60.

RBA Rate Decision

The Reserve Bank of Australia will announce its monetary policy decision on Tuesday and is broadly expected to leave interest rates unchanged.

Policymakers stressed at the June meeting that inflation remains too high and that they remain prepared to raise rates again if necessary. As such, this meeting could prove to be another pause rather than the end of the tightening cycle.

Employment data remains firm, with 76,300 jobs added in June, marking the strongest monthly increase since April last year. While headline CPI eased to 3.9% year-on-year in Q2 from 4.1%, both the trimmed mean and weighted median inflation measures edged higher to 3.6% and 3.5%, respectively.

All of these measures remain above the RBA's 2-3% target range, leaving markets pricing around a 50% probability of another rate hike before year-end.

While the decision itself is expected to be uneventful, the statement could prove more important. Should policymakers reiterate that they remain prepared to tighten policy further, the Australian dollar could find support.

UK GDP Data

UK GDP figures will be released on Thursday and will provide an important update on the strength of the economy ahead of the new Chancellor's autumn Budget.

The economy is expected to have expanded by 0.4% in Q2, slowing from 0.6% in the previous quarter.

Meanwhile, June GDP is expected to contract by 0.1%, suggesting there was little evidence of an early World Cup boost. However, it will also be worth assessing how June's prolonged heatwave affected economic output, particularly as unusually warm weather has continued through the summer.

The figures come after the Bank of England left interest rates unchanged at its latest meeting, although three policymakers voted in favour of a 25 basis point rate hike, highlighting a divided committee.

Despite the relatively subdued domestic backdrop, the FTSE 100 continues to trade close to record highs, reaching another intraday record on July 31. Although it underperformed many of its global peers last week, the index has still gained 3.5% in July and is on track for its fifth straight monthly rise.

The resilience of the FTSE suggests investors remain focused on company earnings and the index's international exposure rather than the UK's relatively modest domestic growth outlook.