RBA’s and BoE’s interest rate decisions in focus

An eventful week is slowly coming to an end, yet the US employment report for April is still to be released and could shake the markets. In the coming week, on the monetary front, we highlight the release of RBA’s and BoE’s interest rate decisions, on Tuesday and Thursday respectively, yet we also note the release of Sweden’s Riksbank interest rate decision on Wednesday. As for financial releases, we make a start on Monday with the release of China’s Caixin Services PMI figure for April and Eurozone’s Sentix indicator for May. On Tuesday, we get Germany’s industrial orders for March, UK’s Halifax House prices for April as well as Eurozone’s and UK’s Construction PMI figures for the same month. On Wednesday we get Germany’s industrial output for March, while on Thursday we get China’s trade data for April and the US weekly initial jobless claims figure. Finally, on a busy Friday, we note the release of Japan’s All Household Spending and current account balance for March, UK GDP for March and Q1, and the UK manufacturing output growth rate for March, from Norway we get the CPI rate for April, from Canada we get April’s employment data and from the US we get the preliminary University of Michigan consumer confidence indicator for May.

USD – Fundamentals to lead the USD

The USD is about to end the week lower against its counterparts, yet the US employment report for April is still to be released and may alter the greenback’s direction. We note that the USD weakened probably also because of the Fed’s interest rate decision. The bank as was widely expected remained on hold, and the accompanying statement highlighted the solid pace of expansions for economic activity, as well as the strong job gains and low unemployment rate. On the inflation front, the bank highlighted the easing of inflationary pressures over the past year yet at the same time also noted that inflation remains considerably above the bank’s target and the Fed “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent”. Similar signals of uncertainty seemed to be stemming out of Fed Chairman Powell’s press conference and the market seemed to perceive it as dovish. The market seemed also to have been prepared for a more hawkish approach by the bank as such and after the release, the USD weakened against its counterparts, while US stock markets were allowed to edge higher after falling the day before. For the time being though, we tend to expect Fed policymakers to maintain a more hawkish approach and if actually so, could provide some support for the greenback on a monetary level. On a macroeconomic level, we note the wider-than-expected drop of the ISM manufacturing PMI figure for April, marking a contraction of economic activity for the respective sector in the US. Also, we note that the release of the ISM non-manufacturing PMI figure for April is expected later today. Yet overall given the low number of high-impact financial releases in the coming week we may see fundamentals, including monetary policy, leading the USD and a possible improvement of the market sentiment may cause some safe haven outflows, thus weighing on the USD.

GBP – BoE’s interest rate decision in focus

The pound is about to end the week in the greens against the USD, remains relatively stable against the EUR and is losing ground against the JPY. On a fundamental level, we note the loss of seat in the House of Commons, for the Tories was a reminder of how the governing party is lagging behind in the polls. Also the news could spark a rebellion within the Conservative Party, in an effort to overthrough Rishi Sunak before UK elections and if actually so we may see the issue weighing oon the pound, as political uncertainty would arise. On a monetary level, amidst some conflicting signals from BoE policymakers, pound traders prepare for the release of BoE’s interest rate decision next Thursday. The bank is widely expected to remain on hold and currently GBP OIS imply a probability of 92.93% for such a scenario to materialise. Market attention is expected to shift towards the release of the accompanying statement. The market seems currently, to expect the bank to proceed with its first rate cut in the August meeting and deliver another rate cut in the December meeting. Should the bank signal a relative hawkish stance, which would allow the bank to keep rates at high levels for longer, we may see the contents of the document contradict market expectations and thus providing some support for the pound and vice versa. Another aspect of the interest rate decision which we tend to highlight is the vote count of the decision as such. In the last decision we had no policymaker favouring a rate hike, eight that voted for the rate to remain unchanged and one that considered that a 25 basis points rate cut would be the correct way forward for the bank. Even should the bank remain on hold as expected, a possible deviation from last interest rate decision’s vote count could affect the pound. Should the number of policymakers in favour of a rate cut increase, we may see the pound slipping as a dovish shift in the bank’s balance of power would be more apparent. On a macroeconomic level, we note the release of the preliminary GDP rate for Q1 on Thursday. Should the rate remain in the negatives at a quarter on quarter level, implying the continuation of the shallow recession in the UK economy may weigh on the pound as it would darken UK’s macroeconomic outlook.

JPY – Japan’s market intervention supports JPY

JPY is about to end the week stronger against the USD, the GBP and the EUR, in a sign of wider strength. The strengthening of the JPY stemmed from the suspected market operations by Japan in support of the Yen on Monday’s and just before Thursday’s Asian session. For the time being, Japan seems to have set a ceiling at how low the Yen could be against the USD, with USD/JPY being at 160.
It’s characteristic that USD/JPY was driven down on Monday as the JPY began the week on the back foot once the pair’s price reached 160 and was driven lower to reach levels below 155. So there seems to be a danger zone, from 155 to 160, about 500 pips wide, and should the pair enter it, the market risks triggering another possible intervention. It’s characteristic, that Japan’s Vice Minister of Finance for International Affairs, Masato Kanda, who is considered Japan’s top currency diplomat, was reported stating that excessive FX moves can have a major impact on Japanese economy while at the same time did not confirm or deny the reports of a market intervention by the Japanese Government. On the other hand, the factors that caused the weakening of JPY are still present as the interest rate differentials of BoJ and other central banks, especially the Fed, remain wide. Overall, the last interest rate decision of BoJ despite some hawkish tones tended to underscore the supportive role of the bank for the Japanese economy. We expect a new equilibrium now to be reached with market focus being on levels of USD/JPY. On a fundamental level, we also note the safe-haven status of the JPY, hence any further escalation of tensions in the wider geopolitical theatre could provide some safe-haven inflows for the JPY. On a macroeconomic level, we note that the industrial output growth rate on a preliminary level for March, accelerated beyond market expectations, improving the macroeconomic outlook for the Japanese economy. Yet on the demand side, we note the wider-than-expected slowdown of the retail sales growth rate for the same month, which in turn may slow down inflation further and thus tends to weigh on JPY.

EUR – ECB set for a June rate cut

The EUR is about to end the week relatively unchanged against the USD and the pound, yet loses ground against the JPY. On a monetary level, we note the market’s expectations for the bank to start cutting rates in its next meeting early June and deliver two maybe three rate cuts in total until the year ends. On the one hand, Eurozone’s HICP rate has neared the bank’s target of 2% as the preliminary release for April showed that the rate was at 2.4%. yet on the other, there is still some distance between the bank’s target and the actual rate, while the rate did not seem to slow down in the past month. ECB officials seem set to start cutting rates and its characteristic that ECB policymaker and chief of the Netherland’s Central Bank Klaas Knot, was reported stating that it is realistic to believe that the ECB would begin cutting rates in the June meeting, should favorable conditions be maintained. The statement gains on importance given that Mr. Knot was well known for his hawkish stance. One obstacle to a possible rate cut in June could be the market worries for a possible rise of oil prices, which in turn could push inflationary pressures higher, yet that does not seem to be the case for now. Hence market speculation for a possible rate cut by the European central bank is allowed to persist, thus weighing on a monetary level on the EUR. On a macroeconomic level, besides April’s preliminary HICP rate for the Zone, we also noted the release of the Zone’s preliminary GDP rate for Q1. The rate accelerated beyond market expectations, escaping stagnation levels of Q4 23, and thus providing some breathing space for the macroeconomic outlook of the zone. It should be noted that the improvement of economic activity in the area seems to be stemming mostly from the services sector rather than the manufacturing sector, which is still suffering a contraction. The last note tends to put a qualitative twist to the outlook of the Eurozone’s economic outlook.

AUD – RBA to remain on hold

The Aussie is about to end the week in the greens against the USD. On a fundamental level, we note that the Aussie as a commodity currency seems to be more sensitive to the market sentiment. Hence a possible more risk-oriented approach by the market could provide some support for the AUD and vice versa. Also, we note the sensitivity of the Aussie to developments in the Chinese economy, given the close Sino-Australian economic ties. Hence Aussie traders may keep a close eye on the release of China’s trade data for April. Despite the trade balance being the high-profile metric, Aussie traders may be more interested in the release of China’s import growth rate, as should the rate accelerate, it could imply more exports of Australian raw materials to China. On a monetary level, we highlight the release of RBA’s interest rate decision on Tuesday’s Asian session. The market currently widely expects the bank to remain on hold keeping the cash rate at 4.35%. It should be noted that the CPI rate for Q1 slowed down, yet is still above the banks’ median inflation target zone of 2%, which tends to keep the pressure up for the bank to maintain rates high for longer. We also note that the market expectations are for the bank to remain on hold throughout the year and any deviations from market expectations are to the upside. Hence should the bank remain on hold as expected the attention of the market is to be placed on the accompanying statement. Should RBA Governor Bullock tweak the banks’ hawkishness we may see the market’s expectations for the bank to remain on hold and thus could weigh on the AUD. On a macroeconomic level, we note the release of the retail trade growth rate for Q1 and a possible acceleration of the rate could imply a boost of the demand side of the Australian economy thus providing some support for the AUD.

CAD – April Employment data to move the Loonie

The CAD is about to end the week relatively unchanged against the USD. On a macroeconomic level, we note the acceleration of the GDP rate for February, which tended to improve the macroeconomic outlook of Canada. On the other hand, economic activity in Canada’s manufacturing sector during April contracted, worrying analysts a bit. Furthermore, we note the deep trade deficit of Canada marked in March, underscoring how the Canadian economy, unexpectedly suffered losses from its international trading activities. In the coming week, we highlight the release of Canada’s employment data for April. Should the data imply a continuance of the slack in the Canadian employment market as reported for March, it could weigh on the CAD substantially. At a monetary level, we note the market’s current expectations for the bank to start cutting rates in its June meeting and deliver another rate cut in its next meeting. It should be noted that at a core level, the CPI rates in March were exactly at the bank’s median inflation zone target of 2%yoy, which enhances the possibility of a rate cut. At the same time, we also note the
comments of BoC Governor Macklem was reported by Reuters stating that “the Bank of Canada is getting closer to being able to start cutting interest rates from their current 23-year highs”. Hence we expect BoC’s intentions to weigh on the Loonie. On a more fundamental level, we note that a possible improvement of the market sentiment, could provide some support for the Loonie, given also its status as a commodity currency. Also, we note the sensitivity of the Loonie to oil prices, given Canada’s status as a major oil-producing economy. Oil prices for the week seem to be dropping and may have weighed on the CAD this week. Should they continue to weaken in the coming week we may see the bearish effect intensifying on the Loonie.

General Comment

In a more general note, we expect the USD to relent some of its initiative in the FX market to other currencies, given that the gravity and frequency of US financial releases seems to be easing. Overall though we have to note that volatility may ease somewhat should there be no surprises, as we have a rather calendar next week. As for US stock markets, we note that US stock markets seem about to end the week in the reds. A number of high-profile companies released their earnings reports, yet in the coming week, we note that the release of the earnings reports of Ferrari (#RACE), Deutsche Post (#DHLn), UBS (#UBS), Disney (#DIS), AirBnB(#ABNB) and Uber (#UBER) could catch the market’s eye. On the fundamentals of US stock markets should Fed policymakers stress the possibility of the Fed maintaining rates high for longer, the market sentiment could turn more cautious thus weighing on US stock markets. Furthermore, we note that gold’s price is falling despite the USD also falling, underscoring the absence of the negative correlation of the USD with the precious metal in the past few days. Hence we tend our attention to other factors with the Fed’s intentions also being in the epicenter. Should Fed policymakers maintain a hawkish rhetoric we may see the US bonds becoming more attractive as the bond yields may rise thus weighing on the non-interest bearing precious metal’s price.

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