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Weekly Market Recap: RBA more bullish while BoE tapers

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This week’s calendar has been loaded with major market movers. On the top was Fed’s chair Jerome Powell Speech, followed by RBA and BOE policy meetings. Market participants also focused on big data as New Zealand released its labor market data for the first quarter.  

Powell affirms Economic Growth despite Pandemic’s outcomes

Federal Reserve chair, Jerome Powell, struck a hopeful tone about the domestic economy in a speech on Monday. However, he emphasized that the economic fallout from the pandemic has disproportionately harmed vulnerable communities.

 “While some countries are still suffering terribly in the grip of Covid-19, the economic outlook here in the United States has clearly brightened,” Powell said in remarks that flagged an upcoming central bank study documenting the disproportionate blow suffered by the less educated and working parents during the coronavirus downturn.

During the speech, Powell confirmed that the economy is reopening, bringing stronger economic activity and job creation, but still not out of the woods yet. 

Last week, The Federal Reserve kept the Fed funds rate range unchanged between 0-0.25%, and maintained monthly QE asset purchases kept at $120bn. The federal committee did acknowledge the firm economic activity and improving the labor market. It signaled that the sectors most impacted by the pandemic have also shown improvement as well. The committee also noted that inflation has risen largely reflecting transitory factors. 

RBA holds Rates at Record Low

Reserve Bank of Australia (RBA) kept the official interest rate at 0.10% as widely expected but revealed an upbeat outlook.  The Reserve Bank expects the economy to grow faster and unemployment to keep falling further than it did just three months ago. Following its policy meeting on Tuesday, the Reserve Bank updated its key economic forecasts. Now GDP is expected to expand by 4.75 % this year and 3.5% over 2022.

“A pick-up in business investment is expected and household spending will be supported by the strengthening in balance sheets over the past year. The unemployment rate is expected to continue to decline, to be around 5% at the end of this year and around 4.5% at the end of 2022.” RBA Policy Statement. 

The statement also stated that the economic recovery in Australia has been stronger than expected coupled with steady improvement in the labor market. It revealed that the number of people with a job now exceeds the pre-pandemic level. The committee is expecting a gradual and modest pick-up in inflation and wage growth. Inflation is expected to be 1.5% this year and rises gradually to its targeted level at 2% in 2023. 

Steady Job gains supports optimistic outlook in New Zealand

The New Zealand dollar experienced high volatility this week as NZD/USD fell by 0.76% on Tuesday before recovering these losses in the next session. The Kiwi gained a boost from a better-than-expected employment report for the first quarter. Employment Change came at 0.6% between January and March, well above the forecast of 0.3%. As well, the unemployment rate dropped to 4.7% from 4.9% previously and beat the estimates of holding at 4.9%.

The latest data support views that the New Zealand economy is performing well, despite the fact that low-interest rates continue to fuel a housing market bubble. The government has made some policy changes to curb property prices, which have surged over 20% during the past year. The government also instructed the RBNZ to consider housing prices when setting policy, which reflects the rising concerns about housing prices.

BoE tapers QE amid recovery optimism

The Bank of England has announced tapering its QE pace amid rising vaccination rates and receding Covid-19 transmission. The Bank has upgraded its assessment for the coming months and now expects the economy to meet and maybe exceed its pre-pandemic level later this year. While the unemployment rate is expected to rise considerably less than previously thought this year.

Amid growing confidence in the recovery, the Bank decided to cut the weekly pace of its asset purchases from £4.4 billion to £3.4 billion a week. However, the bank affirmed that this tapering was an “operational decision” that “should not be interpreted as a change in the stance of monetary policy.”

BoE governor Andrew Bailey during the press conference said that it “is not a tapering decision” as the BoE left its target for the final level of QE assets unchanged.

The BOE’s optimism over the recovery is reflected in upbeat economic forecasts, expecting the economy to get back to pre-pandemic levels in the fourth quarter of this year. And unemployment will likely peak at 5.4%, rather than 7.8% previously expected.

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