FX Week Ahead Overview:
- The RBA rate decision on Tuesday will produce another rate hike, while the ECB rate decision on Thursday will pave the path to one.
- The May Canada jobs report is likely to produce another strong reading, giving the BOC more ammunition for further rate increases.
- Incoming US inflation data are likely to only show modest signs of disinflation, potentially revitalizing Fed rate hike odds and thus helping the US Dollar.
For the full week ahead, please visit the DailyFX Economic Calendar.
06/06 MONDAY | 21:00 GMT | GBP Boris Johnson No-Confidence Vote
A series of missteps and public embarrassments – from ‘Partygate’ to being booed at a Jubilee event – UK Prime Minister Boris Johnson is facing a snap no-confidence vote late in the day on Monday. Prediction markets suggest that Johnson will survive the vote, but the margin of victory is key: while only 180 votes are needed to continue on as prime minister, anything fewer than 260 may be considered a sign of weakness. With a cost of living crisis growing day-by-day and by-elections showing the Tory party falling out of favor, Johnson’s time as prime minister may be running out, regardless of Monday’s outcome.
06/07 TUESDAY | 04:30 GMT | AUD Reserve Bank of Australia Rate Decision
The RBA surprised markets with a 25-bps rate hike in May, eschewing conventional wisdom that policymakers would wait until after Australian federal elections to begin their rate hike cycle. But with the Australian unemployment rate at multi-decade lows – below the RBA’s projected level for year-end 2022 – as well as inflation rates pressing higher, the RBA has decided that swifter action is needed. Another 25-bps rate hike is anticipated (bringing the main rate from 0.35% to 0.60%) and already discounted by markets. What matters to the Australian Dollar more than a rate hike is what the RBA says about the future: how many more rate hikes can be expected over the next few months. Forward guidance is key if the Aussie is going to continue its recent rebound.
06/09 THURSDAY | 11:45, 12:30 GMT | EUR European Central Bank Rate Decision & Press Conference
The gap between the ECB and other major central banks’ rate hike odds that defined much of 2022 continues to close. Rates markets continue to price in the first 10-bps rate hike in July, after the ECB announces an end to its asset purchase program at its June meeting this week (when new Staff Economic Projections (SEP) are released).But thanks to multi-decade highs in inflation pressures across the Eurozone (including in the bloc’s largest economy, Germany), rates markets are now discounting a 50-bps rate hike in December 2022, in what would be the largest single-meeting increase in rates since 2000.Elevated ECB rate hike odds continue to be reflected in the short-end of various European sovereign debt yields. It remains the case that rising short-end bond yields should prove supportive of the Euro.
06/10 FRIDAY | 12:30 GMT | CAD Employment Change & Unemployment Rate (MAY)
The Canadian economy continues to chug along, benefiting more than other developed economies from the recent surge in energy prices (energy accounts for roughly 11% of Canadian GDP). While inflation is a problem, the strength of the Canadian labor market is giving the BOC some reassurance that it can continue to raise rates without derailing the economic recovery. A Bloomberg News survey sees the May Canada employment change at +30K from +15K in April, with the Canadian unemployment rate on hold at 5.6%. These would be strong enough data points for the BOC to proceed with another 25-bps rate hike when it releases its next decision on July 13.
06/10 FRIDAY | 12:30 GMT | USD Inflation Rate (CPI) (MAY)
Headline US inflation rates will remain stubbornly high, even as core rates show signs of disinflation, thanks to ongoing elevation in food and energy prices. According to a Bloomberg News survey, the May US inflation rate is due in at +8.3% y/y, unchanged from April, while the core inflation rate is expected to subside slightly to +5.9% y/y from +6.2% y/y.
While 50-bps rate hikes are priced-in for both June and July, rates markets are slowly coming around to the idea that another 50-bps rate hike will be levied in September, when the Fed meets after the Jackson Hole Economic Policy Symposium.Rates markets are unconvinced that much more tightening will occur thereafter; only 148-bps worth of hikes are priced in through the end of 2022, potentially leaving the US Dollar at a relative disadvantage as other central banks begin to ramp up their fights against multi-decade highs in inflation pressures.
— Written by Christopher Vecchio, CFA, Senior Strategist