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How will policy decisions impact the stock market

Weekly Market Outlook: BoE dominates, US CPI data catches investors’ attention!

Weekly Market Outlook – After the recent FOMC and ECB decisions, it’s now the turn of the BoE to make its announcement on Thursday. Although there is already a strong expectation of a 25 basis points increase, investors will focus on any hints and indications regarding the central bank’s future plans. Additionally, the US CPIs will be closely watched as investors try to decipher whether the Fed will hold off or raise rates in June. 


What to watch on the Economic Calendar this week

Forex Weekly Market Outlook

Monday, May 08:  

  • JPY: Monetary Policy Meeting Minutes 
  • EUR: German Industrial Production 
  • EUR: Sentix Investor Confidence 
  • USD: Final Wholesale Inventories 

Tuesday, May 09:  

  • JPY: Average Cash Earnings 
  • JPY: Household Spending 
  • AUD: Retail Sales 
  • CNY: Trade Balance 
  • EUR: French Trade Balance 
  • USD: NFIB Small Business Index 

Wednesday, May 10:  

  • JPY: Leading Indicators 
  • EUR: German Final CPI 
  • EUR: Italian Industrial Production 
  • CAD: Building Permits 
  • USD: Core CPI 

Thursday, May 11:  

  • NZD: Food price index (FPI) 
  • JPY: BOJ Summary of Opinions 
  • JPY: Bank Lending 
  • AUD: MI Inflation Expectations 
  • CNY: CPI 
  • CNY: PPI 
  • GBP: BOE Monetary Policy Report 
  • GBP: MPC Official Bank Rate Votes 
  • USD: Core PPI 
  • USD: Unemployment Claims 

Friday, May 12:   

  • NZD: Inflation Expectations 
  • GBP: Prelim GDP 
  • GBP: Goods Trade Balance 
  • GBP: Industrial Production 
  • GBP: Manufacturing Production 
  • GBP: Prelim Business Investment 
  • EUR: French Final CPI 
  • USD: Prelim UoM Consumer Sentiment 

You can keep track of all upcoming events, announcements, and data releases by keeping an eye on the Forex Economic Calendar


USD: Market eyes US inflation reports, as Fed hikes & Jobs report follow! 

Following the recent Fed rate hike and release of the April jobs report, the focus has shifted to the upcoming US inflation reports. The April CPI report, set to be released on May 10, is expected to show a 0.4% increase, which would maintain the year-over-year rate at 5.0%.  

While this would break the streak of improvement seen since last July, the base effects suggest that headline CPI is likely to decrease in May and June. Assuming a conservative 0.4% increase in both months, the year-over-year rate could drop to the high-3% range by mid-year. The core rate is projected to rise by 0.3%, matching the smallest increase seen over the past six months, and the year-over-year rate is expected to slow to 5.4%, the slowest rate since November 2021.  

The next day, on May 11, producer prices are set to be reported, with headline producer prices expected to moderate for the tenth consecutive month and core producer price inflation slowing to 3.3% in April. 

Apart from the macroeconomic data, two other issues dominate discussions. The first is bank stress, with a list of 6-10 vulnerable banks causing concern. The quarterly results of the Fed’s Senior Loan Officer Opinion Survey (SLOOS) on May 8 may shed light on this issue. The second issue is the debt ceiling, with Treasury Secretary Yellen warning that the X-date could be less than a month away. A meeting at the White House on May 9 may provide some clarity on the situation. 

As for the Dollar Index, it has stabilized in the 100.80-101.00 area, with a break below targeting the 99.00 area. A move above the 102.00-40 area would help to stabilize the technical tone. 

GBP: More rate hikes on the horizon from the BoE? 

The Bank of England (BoE) increased interest rates by 25 basis points at its March meeting, marking the 11th consecutive hike. However, officials downplayed the surprise surge in inflation during February and maintained a cautious approach regarding their future course of action, stating that further tightening would be required if there is evidence of persistent price pressures. 

Inflation has slowed less than expected, with the headline year-over-year rate remaining slightly above 10%, allowing investors to price in around 60 basis points of additional rate increases until the end of the year. The market is assigning an 85% chance of another quarter-point hike at the upcoming gathering, with the remaining 15% suggesting no action. 

GBP Flat Ahead of Inflation Figures

A 25-basis point hike alone is unlikely to have a significant impact on the pound. Any market reaction may come from the statement, minutes, and/or updated economic projections. The Bank projected in February that CPI inflation would end the first quarter at 9.7% and slow to 3.0% in 12 months. Revising this projection higher or maintaining the same path may allow investors to continue pricing in more hikes, even if officials repeat the same cautious guidance. 

The path of least resistance for the pound/dollar pair is likely to remain to the upside as the Fed is expected to cut rates by around 75 basis points by the end of the year. However, a larger-than-expected slowdown in the first estimate of the UK GDP for Q1, which is scheduled to be released on Friday alongside the nation’s trade data for March, could distort the outlook. 

Sterling hit its highest level since last June, boosted by an upgraded economic outlook and a rise in the April composite PMI to 54.9, its highest since April 2022. The next target is the $1.2660-70 area, with the $1.2760 area representing the (61.8%) retracement of sterling's decline from its June 2021 high. Momentum indicators are not overbought, but the upper Bollinger Band sits at $1.26, with initial support potentially found in the $1.2500-25 band. 

CNY: Trade balance, CPI and PPI numbers on the table! 

On Tuesday, the release of China’s trade data in Asia might capture the interest of traders from Australia and New Zealand, as both countries depend heavily on the world’s second-largest economy as a trading partner. If the trade data turns out to be weak following the disappointing PMIs this week, it could support the notion that the Chinese economy is having trouble gaining momentum after the initial boost from reopening. On Thursday, China’s CPI and PPI figures will also be published. 

China’s Q1 GDP exceeded expectations, leading some economists to raise growth projections for the year, with the economy expanding by 4.5% due to strong domestic consumption and a nearly 15% rise in exports. However, the April PMI fell short, causing some to revive concerns about China’s peak growth. The impact on the managed currency of the upcoming high-frequency data points, including lending figures, trade balance surplus, and inflation measures, is expected to be minimal.  

The lending activity was boosted by CNY14.5 trillion in Q1 2023, with March recording the highest lending activity, and April experiencing a slowdown in lending. China’s trade surplus is anticipated to have narrowed in April, with a rise in exports but a decline in imports. Inflation measures, CPI and PPI, are expected to indicate a rise in deflationary forces, with CPI rising less than 1% and PPI falling by 2.5% through March.  

Despite the volatility seen in other major exchange rates, the yuan remained steady, trading virtually unchanged in the last two sessions, with analysts predicting a downside break in the range of CNY6.89-CNY6.9350 due to the dollar's broader weakness. 

EURO: There is little on the economic calendar this week 

Some national reports are likely to attract attention in the coming days. The March industrial output data from Germany, which showed a decline of 10.7% in factory orders, is likely to draw scrutiny, as is the 1.1% decline in French industrial output. Although Q1 GDP was flat after a 0.5% contraction in Q4 2022, the dismal March retail sales figures, which were much worse than expected, may have contributed to the euro’s decline to a seven-day low (~$1.0940).  

Meanwhile, the March trade surplus figures from Germany, which were slightly larger than expected, may have dampened market interest in the upcoming release of the country’s current account figures on May 12. On May 9, France will report its March trade and current account deficits, while Italy will report its March industrial output on May 10. Notably, Italy’s surprise 0.5% expansion in Q1 was reported in late April. 

Euro fell below its 20-day moving average thrice on intraday basis but didn't close below it, indicating the bullish sentiment of "buying on dips." Momentum indicators show a downward trend, but prices remain largely unaffected, with the euro capped below $1.1100. A convincing breakthrough of this level may lead to the next targets of $1.1175 and $1.1275, corresponding to the (61.8%) retracement of the euro's downtrend since its high near $1.2350 in January 2021. Last week's euro low was slightly above $1.0940. 

JPY: BoJ opinions could be of some interest! 

The Bank of Japan’s recent upbeat quarterly report on wage outlook and its potential support for private consumption, along with increasing break-evens, have led to speculation that the BOJ may adjust its monetary policy settings as early as next month.  

March labor cash earnings are expected to rise by around 1%, and recent data shows that retail sales rose by 0.6% in March, and the broader measure of household spending is seen increasing by 0.8%. Japan is also reporting a March current account surplus of around JPY2.9 trillion, driven by interest on foreign bond holdings, profits, and licensing fees.  

Weekly Market Outlook,Inflation,CPI Market Analysis
Despite initial gains, falling US rates caused the dollar to fall to JPY133.50 on May 4, although a move through JPY135.15 targets JPY135.65 and then JPY136.00-20. The yen seems particularly vulnerable to correction from extreme views that see nearly 100 bp of Fed funds this year. 

AUD: Government will deliver its budget on Tuesday

The Reserve Bank of Australia (RBA) surprised the market by hiking the overnight cash target rate by 25 bp to 3.85%, after one month of pause. The swaps market is pricing in a 15 bp hike by the end of Q3, with the next meeting scheduled for June 6. Melbourne Institute’s consumer inflation expectations survey for May could be the most important of the upcoming surveys, as the RBA has put emphasis on trends in household spending, and the outlook for inflation and the labor market. 

While the RBA lowered its inflation, growth, and wages forecast, it acknowledged that some further tightening of monetary policy may be required to boost the chances that inflation falls back toward its target. The Australian government will deliver its budget on Tuesday, with economists expecting Treasury Minister Chalmers to announce the first budget surplus in 15 years for the year ending on June 30, due to the surge in tax revenues from strong commodity prices and a strong labor market. 

The Australian dollar frayed $0.6600 support on an intraday basis in late April but did not close below it. It has been recovering and reached a two-week high slightly above $0.6755 ahead of the weekend, with the $0.6800 area marking the upper end of a two-month range. An upside break could spur a move toward $0.6860 and then $0.6900-30. 

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