The week ahead -ECB and US inflation later
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GBP: Great data (PMIs), alongside ‘less-dovish’ comments from the Bank of England have kept GBP strong, with many imagining that the UK will hike interest rates ahead of Europe and USA. GBP/EUR at top of recent ranges around 1.1600 and GBP/USD pushing higher around 1.4125.
No ‘Tier 1’ data this week means that other currencies will take centre stage.
EURO: Two events will dominate the market this week, both on Thursday, starting with the June meeting of the ECB in Europe. While no change in monetary policy settings is expected by us or the market, there is the potential for a slightly ‘less dovish’ set of communications than the market is expecting, which could provide a boost to the common currency .. which might push the EURO higher - especially likely as inflation data last week showed Eurozone inflation above 2% for the first time since 2018
USD: As the meeting in Europe happens, we will receive the May inflation report from the USA, so Thursday afternoon promises to be a volatile time for trading. Last month, the reaction to inflation data was greater than that to US employment … so all eyes will be on this number. If the Federal Reserve does not react, which seems likely, then the USD will be under continued pressure.
After a strong week, the USD lost ground on Friday's poor employment data in the US. Leaving the USD at familiar levels against EUR (1.2150) GBP (1.4125) & CAD (1.2100). Most notable has been the holding on to those gains, while it's also interesting there has been no follow through.
As John Markey notes in this morning’s FX commentary: It's also interesting that there has been such little reaction to Yellen's comments over the weekend about 'higher rates being good for the US'. Inflationary pressures are becoming a reality.
CAD: Bank of Canada meeting on Wednesday, where there will lots of scrutiny on the statement and any plans to taper QE further.
AUD: Overnight, S&P affirmed the nation’s AAA rating and upgraded the outlook to stable – justifying a strong recent performance for AUD. After this decent period of strength, CIBC commentators see the AUD rally slowing down. Next month at the Central Bank meeting, they expect the RBA (Central Bank) to extend its accommodative outlook which will certainly pressure the AUD. With Covid infections in Victoria causing more lockdowns and continued trade ‘issues’ with China, this stance seems inevitable. AUD/USD at 0.7700 currently – CIBC see a moderate rise to 0.800 with end of Q2, helped by USD weakness.