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Weekly Market Outlook: All eyes on Fed for Tightening Clues

Tightening hopes revive the US Dollar

It’s a busy week for the greenback with the scheduled release of retail sales data and the top event for the week; the FOMC Meeting. While it is unlikely for the Fed to announce policy changes this meeting, hopes are getting higher that the boosting economic performance will urge the bank to exit its easing plans. 

Given that CPI inflation at 5% and the unemployment rate downward trend, the Fed’s current policy stance may not be appropriate for too long. Usually, markets start pricing higher rates when inflation accelerates to keep prices under control. But considering that the labor market is still far away from its pre-pandemic employment levels, the Fed is likely to keep its wait and see mode for a longer period. 

The Federal Reserve is expected to maintain an ultra-loose monetary stimulus on Wednesday, with all eyes turning to Fed Chair Jerome Powell for clues about the committee’s latest view on inflation. 

The dollar index ended last week’s trading session with mild gains of 0.42%, with expected resistance at 90.60 followed by 90.80 levels. On the downside, failing to breach these levels leaves the dollar under selling pressures towards 90.30 and 90.00. 

Yen is higher ahead of BoJ Meeting 

The Japanese yen managed to keep its gains ahead of the BoJ scheduled policy meeting later this week.  Bank of Japan is expected to keep its policy interest rate at -0.1% and the 10-year Japanese government bond yield target at around 0% with no changes to policy outlook for now.  In Japan, the economy is still haunted by deflation and sluggish growth. That’s why BoJ will not be heading into exiting its loose policy anytime soon. 

Big Data for NZD and AUD 

In New Zealand, GDP data are on top of the calendar. The national economy is expected to grow 0.5% on a quarterly basis in the first three months of the year, after contracting by 0.1% in the previous quarter. The New Zealand economy has been performing better than expected which led the RBNZ to adopt a hawkish tone signaling future rate hikes. 

The RBNZ left interest rates at 0.25% and both its NZ$ 100bn asset purchase programme and the funding for lending programme unchanged in its May meeting. However, markets were surprised by forecasting a rate hike in 2022. The Bank’s economic projections indicate that outlook for the economy in now brighter, and the next move could be tapering the QE programme. 

Australian jobs data are scheduled on Thursday with market consensus points to a significant recovery in employment data. The Australian economy is expected to add more than 30K jobs in May, with unemployment to remain steady near its historical lows of 5.5% from a pandemic peak of 7.4%.

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