Weekly Market Outlook– The Euro and USD will be in the spotlight this week following the release of several economic indicators. Fed and ECB monetary policy paths appear to be diverging more in light of these data. European traders will also pay close attention to the outcome of the French presidential election, as well as the Australian CPI numbers. However, the Bank of Japan’s policy will get the most attention, as it is likely to hold steady despite the falling Yen on global FX markets.
Euro – Hoping for Inflation and Macron Boost
In March, eurozone inflation hit its highest level on record, hitting 7.4% year-on-year. When the flash estimates are released on Friday, it is likely that things will have heated up even further. On the same day, preliminary GDP numbers for the first quarter will also be released. Despite moderate growth in the Eurozone economy over the second quarter, investors will be looking out for any unexpected weakness given the dim outlook for the remainder of the year.
The Ifo business sentiment index for Germany is due out on Monday, while the Euro zone’s economic sentiment index is due out on Thursday. Both will provide investors with a sense of whether business optimism declined in April, affected by the Ukraine crisis and the cost-of-living crisis.
However, if the polls are right, the results of France’s presidential election may bring some good news to the Eurozone this week. As long as the CPI numbers are stronger than expected and Macron wins the election, the Euro will catch a bid again, which was temporarily bolstered by talk of a July rate hike by ECB policymakers. But US data will be just as important for driving the EUR/USD pair.
USD – Inflation has reached multi-decade highs
Tuesday will see the release of US durable goods orders for March, as well as new home sales and consumer confidence index for April. In April, the closely watched index is expected to drop for the fourth consecutive month, dropping to 106.0. Pending home sales will be released on Wednesday, followed by the advance estimate of the first quarter’s GDP on Thursday.
According to analysts, GDP growth slowed considerably in the first three months of the year, with an annualized expansion of 1% compared to 6.9% in Q4. However, Friday’s data on personal income and spending as well as the core PCE price index will be equally important for measuring the health of the American economy.
The US economy is expected to have grown by 0.7% in March, which shows that heightened geopolitical tensions had little effect on consumer spending. Furthermore, it is projected that the core PCE price index rose by only 0.1 percentage points to 5.5% in March.
Following the slightly below-estimated core CPI print, a softer-than-anticipated core PCE reading could reinforce hopes that inflation in the US is starting to peak. While such sentiment may be great for Wall Street, it could hurt the US dollar, which is at two-year highs following Fed Chair Powell’s very hawkish comments.
YEN – The Bank of Japan is in a tight spot
On Thursday, the Bank of Japan will announce its latest policy decision, and the meeting might be significant, despite the likelihood of a change in policy. Japan is slowly experiencing inflationary pressures as input costs soar due to higher energy and raw material costs. Furthermore, the dramatic plunge in the Yen over the past two months has made things even worse for businesses.
Yen depreciation is on a historic course, with a 10.5% depreciation so far this year and more than half occurring here in April alone. Despite the government’s concerns about the Yen’s “somewhat rapid” decline, investors are less convinced by Governor Haruhiko Kuroda’s comments. It shouldn’t be a surprise, since the BoJ has continued its yield curve control policy rather than abandoning it in response to the latest inflation scare.
A blow to the Bank’s upper limit on the 10-year JGB yield led to an increase in bond purchases at the end of March. Further, the bank also vowed to carry out additional market operations in the current quarter in order to defend its yield target. Now the question is how long the BoJ will be able to maintain this policy since the Yen’s depreciation has become a political flashpoint and inflation is on the verge of overshooting the elusive 2% price target.
In the Bank’s quarterly outlook report, inflation will likely be revised up. Investors will be more interested in what changes policymakers make to the forward guidance and the language relating to the exchange rate in the statement if any. The yen may be in for a major rebound if the yield target band is calibrated soon. We’ll see the March jobless rate out on Tuesday, followed by retail sales and preliminary industrial production figures on Thursday.
AUD – RBA to hike rates as Australian CPI rises
The Australian consumer price index readings for the March quarter will be released on Wednesday. The Reserve Bank of Australia’s 2-3% target band is expected to be exceeded by the headline and core rates. The last time the trimmed mean and weighted median CPIs exceeded 3% was in 2010, so this would be quite a significant development for the RBA.
Recently, policymakers began hinting that a rate hike might be coming soon, with the markets fully pricing in a 25-basis-point increase in June. Inflation numbers that are significantly higher than expected could lead to speculation of an early rate hike at the May meeting, lifting the Australian dollar.
Even if there is a good case for a move in May, the RBA would probably prefer not to act before the federal election on May 21. Export prices and the producer price index will be released on Thursday and Friday, respectively, to continue the inflation theme.
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