Weekly Market Outlook – The main focus of this week will be the Fed talk and the latest US inflation and PPI data, which is expected to show a sharp slowdown in inflation. This week is also important for GBP, with the release of Q1 GDP numbers on Thursday. The Eurozone also releases its Industrial Production data on Friday.
USD – CPI and PPI data are likely to soften
The week ahead could be the first sign that peak inflation is near. In the year-over-year comparison of consumer and producer prices, the headline reading is expected to have fallen for the first time since April 2020. However, the drop may not be very substantial. While price pressures remain high, it is important to consider the direction they are heading in. Despite Jerome Powell’s softening tone at the FOMC meeting last week, markets don’t appear convinced a “soft landing” will be possible until inflation slows down.
US CPI data will be released on Wednesday, and US PPI data will be released on Thursday. The US Consumer Price Index (CPI) increased by 8.5% in March, and the core CPI excluding food and energy was up by 6.5%. It is expected that both CPI and PPI data will decrease in April. Thomson Reuters expects 8.1% annual headline CPI and 6% core CPI, respectively, while the PPI is forecast at 8.9%, down from 9.2% in March. Understand how CPI and PPI data can affect exchange rates.
There will be lots of Fed talk in the upcoming week that could signal a difference from where Fed Chair Powell stands on tightening at the June and July meetings. Investors will be keeping an eye on the next inflation report to see if policymakers made a mistake by leaving even more aggressive rate hikes on the table.
GBP – UK to release GDP for Q1 on Thursday
The Bank of England raised rates by 0.25% this week. As a result, the benchmark rate has reached 1.00%, its highest level since 2009. The BoE also painted a grim economic picture at the meeting, revising its inflation forecast to over 10% and warning of a recession.
The UK releases its Q1 GDP figures on Thursday. Following a 1.3% gain in Q4 of 2021, the consensus estimate stands at 1.0%. A loss of momentum in the economy in the second quarter could result in a recession, raising the potential for stagflation.
As January and February have already been published, the GDP report will only include the March figures. The estimate for March points to a flat reading following gains of 0.1% and 0.8% in February and January, respectively.
EURO – ZEW Survey Expectations & Industrial Production Data
Economic activity in the Eurozone has been dampened by the Russia/Ukraine war and the sanctions against Russia. While the war continues, the world’s largest economy, Germany, is posting weak numbers. There are concerns that Germany’s economy will tip into recession if the EU ends Russian energy imports by the end of the year.
The ZEW Survey Expectations, a survey of financial professionals, will be released on Tuesday. We expect Economic Sentiment to fall to -42.5 in May, down from -41.0 in April. The Eurozone releases Industrial Production for March on Friday.
Conflict in Ukraine has exacerbated disruptions in supply lines, affecting industrial production. It is likely that the Eurozone will show a contraction as well, based on the sharp drop in German Industrial Production (-3.9%). As of March, the estimate is -1.8%, down from 0.7% in February.
NZD – RBNZ to Accelerate Rate Hikes
A negative trend is expected in New Zealand retail card spending and a positive trend is expected in the Food Price Index this week. With the cost of living in New Zealand at an all-time high, the Reserve Bank of New Zealand (RBNZ) will be under pressure to raise its interest rates faster since the economy has been showing signs of stress elsewhere.
A higher than expected reading is seen as positive for the New Zealand dollar quotes.
As investors price in a hard landing and an RBNZ behind the curve, and as risk sentiment sours internationally, the NZD/USD has traded significantly in the past two weeks. The NZD/USD currency pair is closing at the week’s lows and may test 0.6200 this week.
The headline inflation rate in New Zealand reached 6.9% in the first quarter. In the second quarter, domestic inflation is likely to remain elevated due to the NZD devaluation and rising energy prices. New Zealand’s Reserve Bank gives a clear indication that it will continue to raise rates by 50 basis points as scheduled in each meeting for the remainder of the year, which may provide upside potential for the currency.
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