Markets Eye CPI, Central Bank Bonanza
The US dollar index came under renewed pressure on Thursday after Jobless Claims jumped, but clearly, investors are not in a hurry to bet the farm on any major FX trends, with big events taking placing in the week ahead. These include the US CPI on Tuesday, which could be the deciding factor between the Fed hiking or not at the next day’s FOMC meeting. We also have rate decisions from the ECB and BoJ at the back end of the week, to look forward to.
AUD, CAD and TRY among large movers this week
This week’s price action has been largely contained when you look across the major FX pairs, gold and indices, although some big moves have been observed in some emerging market currencies (not least the Turkish lira). Among the majors, the AUD and CAD were the exceptions, though, as both rallied after the RBA and BOC surprised with their interest rate hikes.
In fact, it was these rate decisions that rekindled concerns that global central banks, including the Fed, are probably not as close to their terminal rates as expected. Yields rose across the board, which reduced the appeal of gold, and kept the dollar near recent highs as the odds of an additional Fed rate hike this summer rose slightly.
At the time of writing on Thursday, though, the US dollar was again coming under pressure after the weekly jobless claims data showed a much larger rise than expected, fuelling speculation that the labour market is finally starting to respond to the impact of past rate hikes and spike in inflation.
As a reminder, Friday’s jobs report showed a very contrasting picture of the economy with the household survey pointing to job losses while the headline nonfarm payrolls pointing to another big rise in employment. Judging by the jump in jobless claims, it looks like the jobs market is not as strong as the headline NFP print would suggest.
Ultimately, though, it is what the Fed thinks and so I wouldn’t be surprised if the dollar remained within its recent tight range heading into the big week.
Watch crude oil prices
Meanwhile, it is worth watching crude oil prices, which fell and then bounced back as investors weighed a weaker demand outlook against reduced OPEC+ supplies.
Inflation concerns and therefore further policy tightening fears could intensify should oil prices push higher again. Crude prices have stabilised with traders now thinking twice about shorting oil, after Saudi Arabia took the matters into its own hands. After threatening short sellers will be ‘ouching’ last month, Saudi followed through on its warning by voluntarily cutting its oil output by a million barrels a day from July. The rest of the OPEC+ members agreed to extend their previously agreed cuts through to the end of 2024. The OPEC wants higher oil prices (obviously) and may be able to achieve that should demand remains strong enough in the coming months.
US CPI, FOMC, ECB and BOJ in focus
Next week is a central bank bonanza, starting with the Fed on Wednesday, followed by the ECB on Thursday and then finishing with the BoJ on Friday. But don’t forget that we have the key inflation report from the US, which has the potential to move the needle.
US CPI and FOMC meeting
This particular US inflation report will be very interesting to watch, as it will be published just a day before the Fed concludes its meeting and decide on monetary policy. If we see a weaker CPI print on Tuesday, then this could push the major FX pairs, gold and indices sharply higher as that would underpin expectations of a pause in the tightening cycle. Among the majors, we would favour the AUD/USD and CAD/USD (I know, it is USD/CAD) given this week’s hawkish rate decisions by the RBA and BOC, and the potential for oil prices to rally.
However, if CPI comes in stronger, then this could tip the balance in the favour of a rate hike at Wednesday’s FOMC meetings. In this scenario, we could see the dollar surging again, as clearly a potential hike is undesired in these tough economic times. The GBP/USD could be among the pairs to watch for potential downside, given the UK’s not-so-great economic outlook. That being said, comments from some Fed officials, including the Vice-Chair Jefferson, suggests that the Fed may ignore a hot CPI report and pause anyway.
Aside from the CPI and rate decision itself, it is worth noting that we also have the quarterly staff forecasts, updated dot plot and press conference to look forward, too. These have the potential to move the dollar sharply.
ECB set to hike rates by 25bps
We agree with the consensus that the ECB will most likely hike interest rates by 25bp to lift the main deposit rate to 4%, its highest level since 2008. This would be the 8th rate hike in this cycle, with one more likely to be followed next month. It will be interesting to listen to Christine Lagarde, the ECB President, in what the central bank makes of the renewed weakness in German output and signs of disinflation across the eurozone. It could be that we will see a more dovish ECB than we are led to believe with their recent comments. But a revisit of 1.10 on the EUR/USD cannot be ruled, given the potential for a dovish surprise by the Fed.
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