ECB and BoC, closely watched by markets

With the US employment data shaking the markets yesterday and today, we open a window into what next week has in store for us. On the monetary front, BoC’s and ECB’s interest rate decisions on Wednesday and Thursday respectively, are expected to highlight the gap of monetary policy directions around the world and are to be closely watched. As for financial releases on Monday we note the release of China’s trade balance for May, on Tuesday Eurozone’s and Japan’s revised GDP rates for Q1, on Thursday we highlight from the US the CPI rates for May and the weekly initial jobless claims figure, while on Friday we get UK’s GDP rates for April and the preliminary US University of Michigan consumer sentiment for June.

USD – Inflation rates maybe the main release

Maybe the main characteristic of the movement in the forex market was the strengthening of the USD which was initiated by Thursday’s US employment data and at least partially reversed by today’s employment report. Now with the US employment report for May also being out, we expect attention of the markets to be placed on the US inflation data which are to be released on Thursday along with the weekly initial jobless claims figure. We must note that the year on year headline CPI rate for April had reached a 12 year high, confirming the built up of inflationary pressures in the US economy, something that also the Core PCE price index, the Fed’s favourite inflation measure confirmed. The pressure is on for the Fed on the inflationary front; thus the importance of the CPI rates release could be elevated as the market wants to see if the acceleration is to continue into May. On the Monetary front Fed Policymakers maintained their dovish tone, practically reassuring the markets of the Fed’s accommodative role. It should be noted that Fed board Governor Brainard, stated that more progress is still ahead and the economy is still far from the bank’s goals while at the same time, inflation has accelerated more than the bank’s expectations yet it is expected to fade back to 2% or less. In the coming week no Fed policymaker statements are expected as the 2 week blackout, before the Fed’s next meeting, on the 16th of June, is in effect. On US fundamentals, besides the US relationships with China and any possible friction which may occur, we would also note that US President Biden seems to have softened his approach regarding the taxation of corporations in order to get more concessions from the Republicans regarding his infrastructure plan. The headlines seemed to have a positive effect on US stockmarkets which were not able to avoid losses on Thursday though. Overall, the USD seem to be on the verge of a major recovery after its drop since the end of March yet that remains to be seen, as the Dollar’s price action in the coming week, may prove to be pivotal.

GBP – Is the reopening at risk?

The pound seems about to end the week a bit lower against the USD, yet seems to remain pretty stable also against the common currency, JPY and CHF. On the monetary front the confident statements by BoE policymaker Vlieghe seem to continue to keep the monetary outlook for the BoE at medium to hawkish levels, as the scenario of a possible hike early next year cannot be excluded, should the UK employment market rebound faster than expected by the bank. It should be noted that BoE’s confidence seems to continue to support the pound. Fundamentally the Indian variant of Covid seems to be the main worry for pound traders. It’s characteristic that UK’s PM Johnson stated that he would be cautious in lifting further restrictions in June, at least until recent data are released. Hence plans for lifting the restrictions on June 21st may be dependant of the forthcoming data, creating some uncertainty for pound traders, thus possibly weighing on the sterling. Yet overall, even should the reopening be postponed for one or two weeks, the improved economic outlook of the UK seems to be maintained. That’s why we expect pound traders to keep a close eye on the release of the UK GDP rates for April as well as the manufacturing output growth rate for the same month on Friday. Before that though we would also like to note on Monday the release of the UK Nationwide House prices growth rate for May.

JPY – Safe haven flows to dominate once again

JPY seems about to end a second consecutive week of losses against the USD, yet to a lesser extent yet the release of the US employment report may alter that. Main issue fundamentally for Japan continues to be Covid and subsequently the organising of the Summer Olympics. On the positive note the number of new daily cases seems to continue its downtrend, while at the same time the country is about to start vaccinations in workplaces by June 21st, which could speed up the country’s pace of vaccination. On the flip side though a perception that it may be too little, too late, seems to be sinking in slowly but steadily, given that the summer Olympics are to be held in less than 2 months time. Nevertheless the country seems to be going ahead with the Olympics and that despite public doubt and the Covid crisis. On the monetary front, BoJ’s dovishness is ongoing, while it should be noted that the bank did not buy any ETF’s in May, maybe the first time for a full month in a number of years. As for financial releases, we note the release of Japan’s revised GDP rate for Q1 and current account balance for April of Tuesday, while on Thursday we get the Corporate Goods Price growth rate for May.

EUR – ECB in the epicenter

Any slight advances the common currency may have made during the week against the USD, have evaporated yesterday, with EUR about to end the week lower. Fundamentally the main issue for the Zone remains the path of the pandemic, yet the situation seems to be improving, given that the number of new daily cases is dropping. It’s characteristic that German Economy Minister Altmaier stated that the German economy has put the worst of the Covid crisis behind it and may grow at a faster rate, achieving 4% in the current year. We must note that inflationary pressures are rising in the Eurozone, and in April, for the first time since 2018, have surpassed ECB’s target by reaching 2% yoy. That tends to increase the pressure on the ECB to act by possibly tapering its QE programm. Hence market attention is expected to turn to ECB’s interest rate decision, next week on Thursday. ECB is widely expected to remain on hold, keeping rates unchanged at 0.0% and -0.50% for the refinancing rate and the deposit rate respectively. Currently EUR OIS imply a probability of 95.87 % for such a scenario to materialise. Yet the main market worries may focus as mentioned on the bank’s QE program. We expect the bank to maintain its QE program also unchanged at the moment, possibly refraining from any comments and keeping a “wait and see” position. It may prove hard though to fail to recognise that the economic outlook is improving, yet the inflationery pressures mentioned could be rejected as temporary for the time being. Should the bank insist in its dovish tone we may see the bearish tendencies for the common currency intensifying, while should there be some confidence we may see the EUR getting some support. We also highlight the importance of ECB President Lagarde’s press conference which is to follow the release and tends to also increase volatility for EUR pairs. As for financial releases, we note Gemany’s industrial orders and industrial output growth rates for April on Monday and Tuesday respectively. Also on Tuesday we get Germany’s forward looking ZEW indicators for June and Eurozone’s revised GDP rate for Q1.

AUD – Market sentiment to define AUD’s direction

The Aussie may have retreated the most against the USD, among developed economy currencies yesterday and it served us as a stark reminder of how sensitive the commodity currency is to market sentiment. On the monetary front RBA’s dovishness was reaffirmed on Tuesday, providing little if any surprises to the markets and with little effect on the Aussie. Yet we would like to note the positive comment for the Australian Central Bank that “Progress in reducing unemployment has been faster than expected”, which tends to allow for some optimism. On the other hand the banks’ pessimism about low inflation and wage growth was more than evident. Fundamentally we tend to maintain if not increase our worries given that Australia has identified the highly transmitable Delta variant of Covid in the Melbourne outbreak. At the same time the slow vaccination programm of Australia does not exactly help the situation, quite the opposite we may say. As for financial releases next week, Chinese data are to provide an early start for Ausssie traders as on Monday, China’s trade data for May are due out. Aussie traders may place particular weight on china’s import growth rate as it may represent also a high amount of Australian exports of raw materials. Also we would like to highlight the release of Australia’s Business confidence and Business conditions indicators for May as well as June’s consumer confidence, all to be released on Tuesday, while on Wednesday we get China’s inflationery measures for May.

CAD – BoC to maintain hawkishness?

The CAD seems about to break the upper boundary of its past sideways motion as the slight bearish tendencies displayed since the start of the week were reversed. Fundamentally the outlook for Canada seems to be improving yet some doubts exist given May’s employment data released today. Oil prices also tend to remain at rather high levels, given that expectations for demand are high. Its characteristic that the OPEC+ group has raised its oil demand expectations and prices seem about to aim for even higher grounds. It should be noted that WTI prices reached their highest level since late October 2018, providing support for the CAD as Canada is one of the main oil exporting countries. On the monetary front eyes are expected to turn to Bank of Canada’s interest rate decision. The bank is widely expected to remain on hold at 0.10% on Wednesday and CAD OIS imply a probability of 95.5% of such a scenario materialising. Hence we would shift our attention to the bank’s accompanying statement and we may expect the bank’s confidence to be maintained in which case the Loonie may get some support. A recent Reuters poll has noted that the next tapering of the bank’s QE program could be in the next quarter, while a rate hike may be earlier than what the market expects it. Hence we would not be surprised to see the bank paving the way for more hawkishness in the coming months, starting with the meeting next week. As for financial releases, we note on Tuesday, Canada’s trade data for April.

General Comment

Given the lower number of high impact financial releases, we may see fundamentals taking a more active role in shaping the market’s opinion in the coming week. The USD may keep the initiative over other currencies, yet that may be more evident in the last days of the week, when we get more high impact financial releases from the US. Also, once again, we would like to highlight any effect on the USD of the US yields which tended to rise in the past two days and should they continue may provide some support for the greenback. Should US yields continue to rise, we may see also ripple effects being expressed in the US stockmarkets, with main focus being on the high-tech sector probably, as well as gold with both set to suffer some losses. Especially the gold market, given that a rise in the US yields could underscore the opportunity cost suffered by gold bearers. On the flip side though should US yields drop, we may see gold and stocks benefitting.

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