Weekly Market Outlook

Weekly Market Outlook: All Eyes Turn to RBA and ECB Meetings

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Weekly Market Outlook – Central banks meeting and a series of inflation numbers will be in focus this week. RBA is expected to continue its tightening bias and hike rates for the second meeting in a row. Meanwhile, the ECB is widely expected to signal possible rate hike next month. US CPI figures on Friday will have a significant impact on the USD. China will be releasing national services PMI and inflation data beside the trade numbers for May, final Q1 GDP figures from the Eurozone and Japan are also in the spotlight for the week.

RBA to Hike Rates Again

The Reserve Bank of Australia meets on June Tuesday and is widely expected to raise interest rates by 25-50 bp. The central bank began its tightening cycle with a 25 bp hike last month, the first hike since 2010. More than 100 bp hikes are expected in Q3 as the bank fights against soaring inflation. The larger than expected rate hike in May pushed the Australian dollar for notable rallies.

The Australian dollar is holding around $0.72 on Monday after retreating from one-month highs on Friday, after a better-than-expected US jobs report which boosted the US dollar adding pressure on other major currencies including the Aussie. However, the AUD remained more than 5% above its 2022 low ahead of the central bank meeting, and despite the split on the size of the expected rate hike.

Most analysts expect the bank to announce a usual 25 basis point rate hike, while the majority anticipate a larger hike, maybe 40 bps increase. RBA’s May meeting minutes indicated that the board is prepared to raise the cash rate by larger scale at upcoming meetings to tame surging inflation which is currently running at a 20-year high.

ECB – Time to Review the Expansionary Policy

The European Central Bank is finally anticipated to signal a rate hike at next month’s meeting. The ECB has taken a hawkish pivot recently as inflation climbs to significant new highs.

The bank has been playing down the possibility of a rate hike during last year, however, it seems like the bank is finally ready to push on the brakes with 75 bp rate hikes expected this year. Such a move will bring the key ECB rate above the zero-levels for the first time since 2014. Many ECB advocates have advocated a 50 bp hike recently, and after May flash estimates showed that CPI inflation surged to 8.1%, more members may support an imminent rate hike.

Weekly Market Outlook - Eurozone CPI

The updated staff forecasts and the forward guidance will be the main drivers for EUR and policy forecasts in the coming weeks. Usually, the ECB drops signals for changing policy through the updated staff forecasts. The announcement may prepare the markets for the beginning of the tightening cycle in the Euro area. Expected adjustments to the Targeted Long-Term Refinancing Operations rate and the bond purchases programs will also be closely watched.

US Inflation in Focus ahead of FOMC Meeting

The economic calendar is relatively light for the USD, and the main highlight of the week remains the CPI figures for May. Annual inflation is seen steady at 8.3%, slightly below its 41-year high of 8.5% hit in March. On the other hand, the monthly rate may probably spike to 0.7% pushed by higher gasoline prices.

The data will have a significant impact on the market ahead of the FOMC meeting next week. Markets are pricing another 50 bp rate hike, bringing the Federal rates to 1.50%. The bank has raised interest rates by an aggregate of 75 bp so far this year.

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