Sell The Rallies On One Currency This Week

In this article, we will highlight this week’s key risk events. This will include three events which could provide high conviction trading opportunities.

The main event last week was the Bank of England’s May monetary policy decision.

According to ING, the market perceived the BoE to be more dovish than expected. This resulted in GBP weakness and the market pricing out a 2018 rate hike.

This week, the focus will remain on GBP with the release of the UK’s employment report. We will also so key events from Australia, Europe and Canada.

This week’s three events which could provide high conviction trading opportunities are:

  • The UK’s employment report. This will set the tone for GBP after weeks of disappointing data. The UK currency is highly likely to remain under pressure.
  • Australia’s employment. This report typically results in significant AUD volatility. This will also be influential for Australia’s monetary policy outlook.
  • Canada’s inflation report. It will be highly influential to future rate hike expectations. A strong report could bring forward expectations for the next BoC hike.

Tuesday, May 15th

AUD – RBA Monetary Policy Meeting Minutes

The first event of the week will be the RBA’s Monetary Policy Meeting Minutes. These Minutes relate to the RBA’s May 1st policy decision where they kept rates unchanged at 1.50%.

According to Commonwealth bank chief economist Blythe, the next RBA move will be a hike. However, the RBA will first need to see a fall in unemployment and confirmation of higher prices.

As the RBA hold a neutral stance, it’s unlikely there will be anything surprising from the Minutes. However, any new comments which do provide a clear bias could present an opportunity.

Any comments which result in an overall hawkish tone from the RBA could see AUD strengthen. While any comments which result in an overall bearish tone could see AUD weaken.

GBP – UK Employment Report

The UK’s May employment report is likely to be the highlight of the week. This is because of the UK’s recent bout of disappointing data releases and dovish BoE.

According to the ONS, last month’s report saw the Unemployment Rate fall to its lowest since 1975.

Furthermore, the employment rate is at its highest level since records began in 1971.

Despite the overall strong performance from the labour market, GBP weakened upon release.

According to CityIndex, this was due to the miss on Average Weekly Earnings which created a ‘mixed bag’.

Since last month’s release, GBP has remained pressured as CPI, GDP and a dovish BoE all weighed on GBP.

For this reason, another disappointing report from the UK is likely to weigh on GBP. This could even further cement expectations for the BoE to remain on hold for the rest of 2018.

A disappointing employment report could provide an excellent opportunity to short GBP. Especially if Average Weekly Earnings once again disappoints.

Of course, a positive report could provide a reprieve for GBP. This would mean an opportunity to buy GBP; although the higher conviction trade would be a short on a miss.

Any buying of the GBP is likely to be short lived as traders look to sell the rallies and continue the overall negative trend.

GBP – Inflation Report Hearings

Once a quarter, the BoE testifies before Parliament’s Treasury Committee. This includes the BoE Governor and several MPC members.

This event often sees BoE members make comments on monetary policy. Therefore, this can provide great insight into individual members’ views.

Any surprise announcements or change from their usual rhetoric could provide trading opportunities.

However, as the BoE only spoke last week, we wouldn’t expect any significant changes in stance at this time.

Nevertheless, these events have a tendency to provide surprise announcements. They can, therefore, make for some great and unexpected opportunities.

EUR – Flash GDP

European data has tended to disappoint over recent weeks. This has halted EUR’s advance and helped EURUSD to fall to fresh yearly lows.

According to Reuters, this has seen traders scale back their timing for ECB rate hikes.

If EU data continues to disappoint, market concerns are likely to continue increasing. This could further weigh on rate hike expectations and consequently, pressure EUR.

For this reason, a downward revision to Q1 GDP is likely to result in EUR weakness. Of course, a strong upwards revision could ease concerns and see EUR strengthen.

Wednesday, May 16th

EUR – Final CPI

Similarly to Flash GDP, the significance to Final CPI is in part due to the recent bout of disappointing EU data.

Of course, inflation is also important as a key aspect of the ECB’s mandate of price stability.

Inflation in the EU has been relatively subdued since peaking in February 2017. Final CPI Y/Y is already expected to see a downwards revision to 1.3% from 1.2% prior.

A negative deviation could create further concerns over the timing of the ECB hiking. Consequently weighing on EUR and pushing back rate hike expectations.

Thursday, May 17th

AUD – Australian Employment Report

As expressed earlier, the RBA will likely need to see a stronger labour market before looking to hike. This makes Australian employment a key metric to follow.

This report has a tendency to deviate rather significantly, causing substantial volatility.

Furthermore, Employment Change can contrast with Full Time Employment, once again creating volatility.

A strong report is likely to support AUD and provide a great buying opportunity. Especially if Full Time Employment supports any strong deviation in Employment Change.

Conversely, a disappointing report is likely to see AUD weaken. Especially if this includes a significant fall in Full Time Employment.

Of course, Employment Change and Full Time Employment are only one half of this release. The Unemployment Rate will also be key and any deviation here will likely be market moving.

Friday, May 18th

CAD – Canadian CPI

Inflation remains a key focus for the BoC and their mandate for setting monetary policy. However, as expressed by Bloomberg, the BoC has a rather sanguine outlook on inflation.

If inflation begins to increase faster than anticipated, the BoC may need to change its tone. This could bring forward rate hike expectations and support CAD.

Of course, inflation disappointing would support the BoC’s current outlook and steady approach. This would likely weigh on CAD and rate hike expectations.

Therefore, a positive deviation in CPI could provide a great buying opportunity. Conversely, a negative deviation could provide a great selling opportunity.

It’s also worth noting that last week saw CAD well supported by strength in oil. This was due to Trump withdrawing from the Iran nuclear deal.

For this reason, if oil remains influential, any CAD trade will ideally be in the same direction as oil. I.e. strength in oil and a positive CPI report or weakness in oil and a negative CPI report.

If CPI fails to provide any clear bias for CAD, we expect oil prices to remain the primary driver.

Summary

There are many events this week which could provide great opportunities. Yet the best will likely come from UK Employment on a strong negative deviation.

Given GBP’s current negative sentiment, this is an event which you could trade into. However, trading out of the event is also perfectly valid.

Australian Employment and Canadian CPI may also provide high conviction opportunities. Especially on significant deviations which influence monetary policy expectations.

Therefore, both of these events would be ideal to trade out of.

The goal of this article is to help you improve your understanding and ability to trade risk events.

If you would like to learn more about risk event trading, please type your question in the comments below. We read them all and try and reply to as many as we can.

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