The last trading day of the last week in August is predictably slow as dealers attention turns to the beach on the final holiday weekend of the summer. However today is not wholly without risk as market players will focus on Ben Bernanke’s speech in Jackson Hole to garner any clues about the direction of US interest rates at the upcoming FOMC meeting on September 18.

Conventional wisdom is handicapping a rate cut of 25bp, although odds have been significantly lowered given recent reports that the Fed is reluctant to ease monetary policy after the stabilization in the capital markets over the past several days. In reality however, Dr. Bernanke's speech may not have much of a shelf life. Even if he signals a more hawkish posture than the market expects, events in the next two weeks could force the Fed’s hand. If volatility returns to the equity markets the Fed will come under enormous pressure to lower rates or risk tipping the economy into a recession.

In the meantime, the one place in the G10 universe where rates appear to be heading up rather than down is Australia. Retail Sales once again surprised to the upside printing at 0.9% vs. 0.6% forecast while Trade Balance improved to –759 Billion from –1000 Billion initially projected. Australia continues to benefit from its strategic position as a key supplier of commodities to China and its economy continues perform well as a result. As we noted in a special report on central bank monetary policies, “With unemployment rates holding at 33-year lows of 4.3 percent and domestic data signaling resilient growth in demand and activity, the RBA may remain concerned that strong economic conditions will put upward pressure on inflation…The next round of CPI data is not due out until late-October, but interest rate swaps are currently pricing in a 25 basis point hike before year end, creating the potential for an increase in November.”

That’s not the case however in Switzerland where today CPI data was markedly lower than expectations, printing at a very meager 0.4% annual rate. The news provided fuel for franc doves who have argued that the SNB may choose to keep rates on hold given the absence of any pricing pressure in the system. Today’s report certainly casts doubt on a potential SNB hike, especially if ECB decides to remain neutral in September. The EUR/CHF cross has gained ground on further carry trade flows, however we believe any upside potential may be limited as SNB remains concerned about the weakness of the currency and may tighten rates despite the lack of any signs of inflation if the franc sees additional declines against the euro.

Boris Schlossberg is a Senior Currency Strategist at FXCM.