Weekly Market Outlook: Central banks meetings are in focus this week ahead of the NFP release on Friday. The Bank of England is expected to raise rates for the second time since the pandemic hit, while the Reserve Bank of Australia and European Central Bank are widely expected to stay on hold. The US markets will be watching the non-farm payrolls as four rate hikes are priced in for 2022.
Key Releases on the Economic Calendar
- RBA Cash Rate
- CAD GDP
- NZD Employment Data
- OPEC-JMMC Meetings
- BoE Rate Decision
- ECB Meeting/Press Conference
- CAD Labor Market Data
- US NFP
RBA Likely to Deliver a Hawkish Rate Guidance
Rising inflationary pressures and the drop in unemployment will likely push the Reserve Bank of Australia to switch its interest rate guidance on Tuesday. Though the central bank is expected to stay on hold, the board may have to review its thinking on the interest rate path this year.
Inflation is way ahead of the RBA’s expectations, rising to 3.5% in Q4 2021 due to higher energy prices and increasing demand. December’s unemployment rate showed a sharp drop to 4.2%, a year earlier than the RBA predicted.
The bank is widely expected to end its government bond purchase program, paving the way for a possible rate hike this year.
BoE on Track to a Second Rate Hike
The Bank of England looks on course to another rate hike in less than two months. Interest rates are widely expected to rise to 0.50%, reversing more than the pandemic reductions as inflation hit the highest levels in nearly 30 years. A series of rate hikes are almost certain before year-end.
The Bank of England decided in its December meeting to increase interest rates by 15 bp to 0.25%, for the first time since the pandemic hit the economy in 2020. Meanwhile, the Committee voted unanimously to maintain asset purchases at £875 billion. The bank justified its move by continuing upward pressure on CPI inflation against the previous outlook for inflation to fade as supply disruption eased, global demand rebalanced from goods to services, and energy prices stop rising.
However, the committee noted that the Omicron variant poses downside risks to activity in early 2022. So, medium-term inflationary pressures are still uncertain.
Annual inflation jumped to 5.4% in December of 2021, the highest since 1992 as inflationary pressures persist. The forward guidance regarding the timing of a rate hike, which is likely to be hawkish, will have the most impact on the Aussie.
ECB: Inflation is Soaring, But…
Unlike the BoE and RBA, the European Central Bank is expected to have another non-event meeting on Thursday. Despite rising inflation, there is actually no urgent need to alter the policy path at least through the first quarter. ECB President Lagarde has repeatedly downplayed rate hikes in 2022, but that didn’t stop the markets from pricing in rate hikes.
However, there are growing speculations that the ECB is finally ready to conclude its Pandemic Emergency Purchase Program (PEPP) in March. The bank announced earlier its willingness to temporarily expand the longer-running Asset Purchase Program (APP) in Q2. But in any case, it seems like the Eurozone will be stuck with lower rates and QE for longer.
Slow economic growth and subdued wages remain a hurdle for the ECB. Without solid wage growth, elevated inflation won’t stay around for long.
Flash estimates of the block’s January CPI will be released on Wednesday. Historically, the inflation rate tends to slow down in January. Headline inflation is seen at 4.4% retreating from 5% in December. The core rate is expected to crawl back from 2.6% to 1.8%.
NFP: Another USD Booster?
All eyes will be on January’s Non-Farm Payrolls on Friday, which is expected to confirm the Fed is on track to raise rates in March. The economy is expected to add 166K jobs in the first month of the year, while the unemployment rate is seen at 3.9%, unchanged from December.
Thanks to the robust labor market, solid economic growth, high inflation, and of course Fed tightening bias, the US Dollar index was up by nearly 7% in 2021, the biggest annual gain in 6 years. It looks like the USD rally won’t cool down anytime soon.
US employment has increased by 18.8 million since April 2020, but is still down 2.3%, or 3.6 million, from its pre-pandemic levels in early 2020. Meanwhile, the unemployment rate declined to 3.9%. In 2021, average hourly earnings have increased by 4.7%.
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