Recession fears fuel dollar gains as markets start a busy week

Investors fretting about a potential global recession and tightening monetary policies began the new week on a down note Monday as European stock markets opened lower. While most central banks continue to raise rates, the dollar extended its climb amid concerns over global growth.

Policymakers at Jackson Hole

Powell will headline a host of policymakers at Jackson Hole later this week. There is a risk that he may not meet investors' hopes for dovish policy changes.

According to the CME FedWatch Tool, the market prices in a 54.5% chance of another 50-basis-point rise in September and a 45.5% chance of a 75-basis-point hike. Therefore, if investors believe that the Fed has departed from these bets, the market will react accordingly.

Further, if Powell agrees to take on the task, he will bring an end to the market debate. As the Fed members have repeatedly stated, they will raise rates until they see clear evidence that inflation is down - and they care about core inflation, not volatile food and energy prices. In contrast, Powell said the Fed would eventually consider slowing rate hikes in a July 27 press conference. According to Powell, the Fed will decide on rate increases "meeting-to-meeting," not through "forward guidance."

As a result, the market interpreted this as the Fed's dovish stance. Eventually, the Fed will slow down rate hikes. Still, Powell clarified that it will only do so once it has compelling evidence that inflation has fallen. Powell also said he would tolerate a recession if needed to accomplish the mission.

Events of the week

Several economic reports are on the economic calendar for the new week, including personal income and expenditure figures as well as the personal consumption expenditures price index, the Federal Reserve's preferred measure of inflation. PCE prices increased 6.8% in the 12 months to June, the largest gain since January 1982.

A revision of 0.9% contraction in the second-quarter gross domestic product is one of the other data points.

A report on durable goods orders, initial jobless claims, and PMI data for July will also be released. Data on new home sales will provide further insight into the housing market's cooling.

In the Eurozone, the August PMI data will be released on Tuesday, after the composite PMI dropped below 50 in July, indicating declining business activity. As energy prices in the euro area continue to rise, PMI readings are expected to decrease again.

Consumer confidence data will be released later Tuesday. It is expected to hit a new record low after hitting an all-time low in July.

The minutes of the European Central Bank's July meeting will also be of interest to market watchers later in the week, as officials raised rates by 0.5% last month and flagged another increase but did not commit to its size at their upcoming meeting.

The UK PMI data will be released on Tuesday after the Bank of England warned earlier this month that the economy would get into recession at the end of this year.