In this article, we will review last week’s key events and discuss the top five risk events for this week.
These events could provide trading opportunities for the week commencing 23rd April 2018.
This week’s key events are:
• Tuesday, April 24th: Australian CPI
• Thursday, April 26th: ECB Monetary Policy Decision
• Friday, April 27th: BoJ Monetary Policy Decision, UK Preliminary GDP, US Advanced GDP
After weeks dominated by geopolitical tensions, last week saw the market’s focus shift back towards monetary policy.
Last week proved to be a difficult week for GBP following a string of disappointing data releases.
Tuesday’s UK employment report saw the Unemployment Rate unexpectedly fall to 4.2% from 4.3% in February. Employment Change increased by 55,000 versus market consensus of 33,000.
According to the UK’s Office for National Statistics (ONS), unemployment in the UK is now at its lowest level since 1975.
Despite the positive Unemployment Rate, the market focused on the Average Earnings component of the report. This disappointed market participants, remaining unchanged at 2.8% versus expectations for an increase to 3.0%.
Wednesday’s inflation report added further negative sentiment, with UK CPI missing expectations.
Headline CPI for March fell to 2.5% Y/Y versus expectations of remaining at 2.7%. Core CPI fell to 2.3% Y/Y versus market consensus of increasing to 2.5% from February’s 2.4%.
Finally, Thursday’s UK Retail Sales also missed expectations. Specifically, we saw Retail Sales Y/Y slowing to just 1.1% in March versus expectations for an increase to 2.0%.
Acknowledging this week’s disappointing data, BoE Governor Mark Carney suggested that a May hike was by no means a certainty.
Furthermore, Carney stressed that there would likely be differences of views between MPC members at May’s meeting.
In response to Carney’s comments, markets are now only pricing in a 40% chance of a May hike (down from around 70% at the beginning of the week).
Last week also saw Canadian monetary policy in focus.
On Wednesday, the BoC left monetary policy unchanged with the Overnight Rate at 1.25%. The central bank reiterated that it will increase rates over time. However, accommodation will be needed to keep inflation on track.
Although its overall stance remained unchanged, the BoC slashed its growth forecast for Q1 2018 to just 2.20% from 2.70%. As such, we saw CAD weakness across the board.
In its accompanying press conference, CAD extended on its losses after BoC Governor Poloz stated that ‘interest rates may need to remain below the neutral range’.
Friday’s Canadian inflation report for March was equally as disappointing. Headline CPI missed expectations at 0.3% M/M and 2.3% Y/Y versus market consensus of 0.4% and 2.4% respectively.
Furthermore, the BoC’s measure of Core CPI slowed to 0.2% M/M and 1.4% Y/Y from February’s 0.7% M/M and 1.5% Y/Y.
Following the report, CAD fell to an 11-day low with USDCAD breaking back above the 1.2700 handle.
This week will see the market’s focus remain on monetary policy. Here’s what to look out for:
Tuesday, April 24th
The first market moving event of the week will be Australian CPI for Q1.
This event consists of three key measures: Headline CPI. RBA Weighted Median CPI and RBA Trimmed Mean CPI.
For each measure, there will be a year-over-year (Y/Y) and a quarter-over-quarter (Q/Q) release, making a total of six data points.
Due to inflation being a key focus for the RBA, a significant deviation in any of these data points has the potential to move AUD and influence rate hike expectations.
As a whole, the markets expects inflation to remain little changed for Q1.
Headline CPI is expected to improve to 2.0% Y/Y from 1.9%. Weighted Median CPI should slow to 1.9% Y/Y from 2.0%, while markets expect Trimmed Mean CPI to remain unchanged at 1.8% Y/Y.
With CPI expected to be relatively unchanged for Q1, any significant deviation could provide a trading opportunity, especially if headline CPI Y/Y can print above 2.1%.
A print of 2.2% or higher would see inflation in Australia reach its highest level since 2014 and exceed all market expectations.
On the other hand, a disappointing report would continue to support expectations for the RBA to remain on hold until at least Q1 2019.
It is worth noting that commodity prices have been particularly influential to AUD lately.
Thursday, April 26th
ECB Monetary Policy Decision
Thursday will likely be the highlight of the week. The ECB will announce its latest monetary policy decision.
The ECB is widely expected to keep monetary policy unchanged at their April meeting. All 90 analysts polled by Reuters expect the Minimum Bid Rate to remain at 0.00%, the Deposit Facility Rate at -0.40% and the Marginal Lending Rate at 0.25%.
With the ECB expected to leave monetary policy unchanged, the market’s focus will revolve around any further insight into the ECB’s QE programme and its future rate hike path.
A hawkish tone from the ECB and positive references towards ending QE or hiking rates would likely see EUR strengthen.
Conversely, a dovish tone with any concerns over the economy, the value of EUR or doubts over the ECB’s QE programme ending by September are likely to see EUR pressured.
As a whole, providing nothing fundamentally changes , EUR is likely to maintain its fundamentally bullish bias.
With that being said, as ECB President Draghi is widely considered by many to be a dove, we advise approaching the ECB’s accompanying press conference with a degree of caution, especially if holding any EUR long positions going into the event.
Friday, April 27th
BoJ Monetary Policy Decision
The first of Friday’s potentially market-moving events will be the BoJ’s April monetary policy decision. Keep in mind that there is no set time for this release.
The BoJ is widely expected to keep rates on hold at its April meeting.
Analysts polled by Reuter’s expect the BoJ to maintain its stance of interest on excess reserves at -0.10% and QQE with yield curve control with the 10yr yield targeted at around 0%.
Although the BoJ is expected to keep policy unchanged, the market will be keeping a lookout for any discussion on tapering or tightening.
If rumours of tapering do begin to surface, JPY will likely strengthen with a bullish shift in its fundamental outlook.
UK Preliminary GDP
Preliminary GDP is the UK’s first estimate for Q1 GDP. It consists of a quarter-over-quarter and year-over-year release.
Forecasts suggest that the UK’s rate of growth for Q1 should remain relatively unchanged from 2017’s Q4.
GDP Q/Q is expected marginally lower at 0.3%, compared to Q4’s 0.4%.
GDP Y/Y is expected to print unchanged at 1.4%.
Following from last week’s string of disappointing UK data releases, providing there are no surprise announcements before Friday, the bias for this event will likely be to the downside
A disappointing report will also potentially take a May interest rate hike off the table.
If this is the case, GBP will likely continue its descent and weaken.
Conversely, a strong positive deviation could reignite May’s rate hike expectations and result in GBP strengthening.
US Advanced GDP
Advanced GDP is the US’s first estimate for Q1 GDP.
Although the report consists of multiple other data releases, the headline GDP figure consists of only a quarter-over-quarter print.
Markets expect The Bureau of Economic Analysis (BEA) to report that the US economy grew by just 2.0% in Q1. This would be a marked slowdown from 2.9% in the final quarter of 2017.
A significant deviation will once again likely result in a trading opportunity. However, the extent of the market’s reaction could be more limited than usual.
Remember, geopolitical developments regarding trade wars with China, or tensions with Russia over Syria have overshadowed US economic data over recent weeks.
Although geopolitical tensions have eased, if geopolitics come back into focus, the significance of this event could quickly diminish.
However, if the market’s focus remains firmly fixed on monetary policy, this data point could be highly influential as to whether the Fed could hike rates four times this year.
A positive report with stronger than expected growth could see an increase in expectations for four hikes and consequently result in USD strength.
All of this week’s key events could provide opportunities to trade out of a significant deviation.
However, given the current bearish sentiment bias for GBP and the risk that a miss on UK GDP could take a May hike completely off of the table, this could also be a good event to trade into.
With US GDP also expected to slow from Q4, any negative USD sentiment before Friday could also present an opportunity to trade into the event.
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