Weekly Market Outlook

Weekly Market Outlook: FOMC Minutes, EUR Flash PMIs and RBNZ Rates to Watch

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Weekly Market Outlook — Risk sentiment is fluctuating as investors speculate on the possibility of a recession. May’s flash PMIs might help guide expectations in the coming week. The FOMC minutes and PCE inflation readings will be a couple of additional drivers for the dollar in the US. Any sign of peak inflation in the coming months would help calm nerves as markets watch closely for it. The RBNZ is expected to increase the interest rates once again shortly.

USD — In Focus Amid Recession Risks

The US does not appear to be experiencing a recession as severe as Europe. In reality, however, the markets are catching up to reality, which up until now believed the American economy was strong enough to avoid a sharp downturn. Wall Street is back in the red after this sudden shift to a bleaker outlook knocked down the US dollar. 

With a lot on the US calendar next week, investors are likely to be on the lookout for recession warnings. S&P Global’s flash PMIs for May will be released on Tuesday, the first indication that all areas of the US economy have begun to struggle in May due to soaring prices, higher borrowing rates, and global uncertainty. 

Weekly Market Outlook

The new home sales for April will be released on Tuesday, and durable goods orders will follow on Wednesday. The second estimate of Q1GDP growth and pending home sales are due on Thursday.  

In contrast, Friday’s releases will garner the most attention, including personal income, consumption, and PCE inflation. It is expected that incomes and spending will both grow at healthy rates in April. Due to speculation that inflation in the US is at a turning point, the main focus will be on the core PCE price index. 

Inflation pressures are expected to subside soon, allowing the Fed to stop front-loading rate hikes. The minutes of the May FOMC meeting, which will be published on Wednesday, will be scrutinized for views on inflation possibly peaking soon. The overall weak figures will likely intensify the dollar’s decline, but there is also an upside risk, both from economic activity gauges and price data. 

EURO — Will PMI figures reflect investor concerns?

The European Central Bank and the Bank of England are in one of the most dreaded spots that policymakers face. A policy of negative rates is about to be abandoned by the ECB, potentially tipping the euro area into recession, while the BoE is making desperate attempts to avoid hiking rates by 50 basis points despite the fact that inflation jumped to 9% in April. 

However, investors may have lost sight of some positives recently due to so much doom and gloom. The Eurozone economy, for example, is still benefiting from the reopening phase post-Omicron, and UK consumers might not have completely given up on splurging because of the tight labour market. 

The Ifo business climate index will attract attention on Monday in advance of the private sector PMI numbers on Tuesday. If the eurozone and UK flash PMIs are a bit stronger than expected, the euro and pound could benefit. Additionally, relatively good PMI prints may also boost broader market sentiment amid the elevated risk of stagflation which is weighing heavily on risk assets right now. 

German economic data will resume focus on Wednesday, with GDP and consumer sentiment to close out the week.

NZD — RBNZ is Expected to Hike 50 bps Again

The Reserve Bank of New Zealand meets on Wednesday and is expected to hike interest rates for the fifth meeting in a row. Analysts expect policymakers to keep the 50-bps increase from their previous decision, lifting the cash rate to 2.0% on Wednesday.

Weekly Market Outlook,inflation Market Analysis
RBNZ Interest Rates
An increase in the interest rate can have a positive effect on NZD.

The RBNZ’s latest inflation expectations survey solidified expectations of a double hike. Still, the report isn’t entirely disconcerting. Despite rising one-year inflation expectations, two-year inflation expectations appeared to be stable at just under 3.3%. Policymakers may therefore indicate a slower pace of rate increases after the May meeting. 

Traders will be watching the retail sales numbers from the first quarter a day earlier. If the data fails to impress and the RBNZ’s rhetoric is toned down a little, the New Zealand dollar could be vulnerable to more selling pressure.

AUD — Flash PMIs & Retail Sales Data are due

As the Reserve Bank of Australia just began its tightening cycle, the size of the rate increase for June is still uncertain. After the generally positive April jobs report, the flash PMIs due on Tuesday may further bolster the case for a rate hike greater than 25 bps in June if they indicate that business activity was little affected by rising cost pressures and the lockdowns in China. 

Wednesday and Thursday will highlight construction output and capital expenditure data from the first quarter, while Friday will feature preliminary retail sales data for April. As business spending had declined substantially in the second half of 2021, a strong recovery in the first three months of this year would indicate that the recovery is now on a much more solid footing. 

Despite a six-week slide against the greenback, the Australian dollar has been unable to claim the $0.70 handle. Positive figures could help it gain a competitive edge. However, at the start of the week, the Aussie may be shaken by political risks. Australians will vote for a new government on May 21. It’s possible that the Australian dollar could weaken against its main rivals if Scott Morrison’s Liberal-National coalition loses to the opposition Labor Party. 

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