Global financial markets are likely to remain sensitive to a series of key developments this week, with US inflation data, Federal Reserve policy signals, elevated crude oil prices and geopolitical risks expected to drive sentiment, according to the HDFC Treasury Desk.

The key focus will be on the US July Personal Consumption Expenditures inflation data and Federal Reserve Chair Kevin Warshs address at the Jackson Hole Symposium. Markets will also closely monitor developments related to potential US sanctions on Iran amid continuing concerns over disruptions to global oil supplies.

The US Dollar Index declined 0.9% last week to 98.74 after the US Treasurys decision to increase buybacks of longer dated securities weighed on US yields and the dollar. The weakness in the greenback has supported major developed market currencies, with both the euro and British pound rebounding against the US dollar.

US July PCE inflation will be closely watched for signals on the underlying inflation trend and the Federal Reserves interest rate outlook. Headline PCE inflation is expected to increase 0.1% month on month, while core PCE inflation is projected to rise 0.2%. The Jackson Hole Symposium begins on Thursday, with Warshs address on Friday expected to provide further clues on the future direction of US monetary policy.

In India, the release of July industrial production data on Friday will be an important indicator for assessing the strength of industrial and manufacturing activity.

Crude oil prices remain a major source of market risk. Brent crude gained more than 6% last week to around $94 a barrel amid concerns over supply disruptions in the Middle East. Prices eased slightly to around $93 a barrel in early trade as markets awaited fresh US sanctions on Iran. However, renewed threats from Iran to disrupt oil exports through the Gulf are expected to keep crude prices volatile.

Gold also recorded strong gains, rising more than 5% last week to above $4,600 an ounce. The precious metal continued to strengthen amid weakness in the US dollar and demand for safe haven assets.

In the foreign exchange market, EUR/USD moved above 1.17 last week, supported by broad dollar weakness and stronger Euro Area economic data. The August manufacturing PMI rose to 52.8, while the services PMI remained at 51.7. HDFC Treasury Desk expects EUR/USD to remain in the 1.16 to 1.175 range in the near term, although stronger US inflation data or a hawkish tone from Warsh could put pressure on the euro.

USD/JPY remained close to 159 as the wide US Japan yield differential continued to weigh on the yen. However, rising Japanese yields, expectations of further Bank of Japan tightening and the possibility of intervention near the 160 level could limit further yen weakness. The pair is expected to remain within the 158 to 160 range this week.

The Indian rupee also remained under pressure. USD/INR closed at 95.69 on Friday, weakening 0.3% over the week as higher crude prices and importer dollar demand outweighed support from broader US dollar weakness. Continued RBI intervention is expected to limit depreciation beyond the 96 level. Indias foreign exchange reserves increased by nearly $10 billion to $716.9 billion as of August 14, supported by strong dollar inflows following recent RBI measures. HDFC Treasury Desk expects USD/INR to trade within the 95 to 96 range in the near term.

Domestic bond yields remained elevated, with the 10 year government security yield closing at 6.85% on Friday after touching a two month high of 6.88%. Higher crude prices, rising global bond yields and concerns over the domestic inflation and monetary policy outlook continued to exert upward pressure on yields. The 10 year yield is expected to remain within the 6.80% to 6.95% range in the near term.

Indian banking system liquidity remained comfortable, with a surplus of Rs 3.5 lakh crore as of August 20, supported by inflows through the RBIs special swap facility. Cumulative foreign currency inflows under recent RBI measures reached $72.8 billion as of August 21, including $65.4 billion through FCNR(B) deposits.

Month end government spending could provide additional liquidity support during the week, although the RBIs Rs 2.5 lakh crore seven day VRRR auction is expected to absorb part of the surplus. With the FCNR(B) swap window remaining open until August 31, system liquidity is expected to stay comfortable in the near term.