Weekly Market Outlook – The FOMC minutes and ECB meeting minutes are likely to attract investors’ attention this week. Both can indicate whether policymakers are worried about rising inflation and if they plan to raise interest rates. RBA isn’t likely to announce a policy shift at its meeting, but Canadian employment figures could boost expectations of a 50-basis-point rate rise by the BoC. Yet, the geopolitical situation with Ukraine will likely have a greater impact on the markets once again.
US FOMC minutes
The US Federal Reserve increased interest rates by a quarter percentage point from near zero earlier this month, as the US fights the highest level of inflation in the past four decades. At each of its remaining six meetings this year, the Fed is expected to raise interest rates in an effort to curb rising prices. Minutes from Wednesday’s Fed meeting will likely reveal how events in Ukraine influenced policymakers’ thinking about interest rates.
We already know there was some disagreement about the rate of tightening, with St. Louis Fed president James Bullard urging a faster rate hike, and increasing the Fed funds rate to 3% by the end of the year. A more moderate approach might see the Fed funds rate rise to 1.75%-2% by year-end, though even that forecast leaves room for a half-point increase.
Fed policymakers have indicated that a half-point increase is likely at the next meeting in May. It’s obvious that even doves, like Neel Kashkari of the Minneapolis Fed, believe that monetary policy needs to be tightened, especially if the high inflation in the coming months persists.
Federal Open Market Committee members raised their inflation forecast for 2022 to 4.3%, up from 2.6%, and their forecast for 2023 to 2.7%, up from 2.3%. Meanwhile, GDP growth estimates were lowered to 2.8% in 2022, and 2.3% in 2023. Despite these adjustments, the inflation forecast for this year still predicts less than 6.1% price growth. US bond markets are already pricing in future rate hikes, but there is concern that the Fed may overreact in its desire to curb inflation. March meeting minutes could confirm those concerns.
ECB officials made a surprise announcement at their recent meeting that the bank plans to taper its asset purchase program with a view to ending it in Q3. Additionally, the ECB did not mention whether interest rates would remain at current levels, opening the way for a possible interest rate hike later this year.
While inflation runs high across the eurozone, figures from northern European countries, including Bundesbank head Joachim Nagel, are talking about the need for tighter monetary policy. Nevertheless, an interest rate hike would add pressure to the heavily indebted southern European countries. Learn why Forex Traders should Care About Interest Rates given its significance.
The recent remarks by some of the bloc’s policymakers indicate that growing concern exists that the ECB is not keeping up with interest rates. ECB meeting minutes expected this week may shed light on the severity of those concerns.
The RBA meets on Tuesday but is not expected to follow the wave of central banks that raised rates in March. The Australian central bank policymakers are in no hurry to raise borrowing costs, despite the clear evidence that the Australian economy has bounced back strongly from the Omicron wave and with a tightening labour market.
The RBA is likely to again reiterate its aim to sustainably achieve its inflation target of 2-3%, and for that to happen, wage growth will have to pick up more substantially than it has so far. Thus, no change in policy is expected next week, although Governor Philip Lowe may hint that the cash rate could rise later in the year.
Inflation pressures have escalated considerably from the start of the year when the RBA persisted that a rate hike in 2022 was unlikely. It is possible that the RBA will follow major central banks soon and raise rates from their current 0.1% level. Investors are expecting the rate hike to occur in June.
Considering the current economic environment, it’s not out of the question that the RBA makes a move this month, even if it’s only to stabilize inflation expectations. Thus, the Australian dollar will be influenced by the broader market mood as well as by commodity prices.
The expectation that the Bank of Canada will increase rates has also skyrocketed since Western sanctions against Russia caused commodities and energy prices to soar. The BoC has already been tightening policy considerably this year, as the Canadian labour market has now recovered fully from the pandemic and wage growth could soon accelerate above the modest pace of around 3%.
Friday will be the release date for Statistics Canada’s labour force survey for March. In February, the country’s job market added 337,000 jobs, more than offsetting a loss of 200,000 jobs in January and lowering the unemployment rate to 5.5%. The Ivey PMI is due for release on Wednesday, which measures the overall health of the Canadian economy.
The above picture is a graphical representation of Canadian Employment Statistics. Growth in the indicator can have a positive impact on CAD quotes.
BoC officials have been dropping hints lately that they may need to move in 50-bps increments, so a strong jobs report would increase the chances even further than the current probability of 70%. In addition, it will protect the Canadian dollar from further falls in oil prices following last week’s pullback caused both by improved risk sentiment as well as the United States releasing more of its strategic petroleum reserves.
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