Last week was rather boring in terms of scheduled event risk, but fundamental traders will be more than satisfied with the upcoming slate of data releases. There are three central bank meetings this week, starting on Wednesday with the Federal Reserve and ending on Thursday with the European Central Bank.
In between, the July Chinese PMI Manufacturing index should add to what should already be high volatility around the Australian Dollar. More so than any other two currencies, the Australian Dollar and the US Dollar could see the greatest volatility this coming week.
Rate Hike Probabilities / Basis-Points Expectations
See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
This is the most important event for the week as market participants eagerly await the Fed’s next move regarding QE3. At the June meeting, a more hawkish policy path was laid out, but policymakers have spent the weeks since backtracking to revive their dovish credentials. It is of no surprise then that US equity indexes have surged to fresh highs in the interim, whilst the US Dollar has seceded ground across the board.
The latest round of rumors suggests that the Fed will clarify its forward guidance strategy, so as to further segregate the outcomes of “tapering QE3” and “tightening monetary policy.” Already the rise in US interest rates has hurt the housing market; and therefore it is very likely that Fed Chairman Bernanke & co. use this coming meeting to stem the US Treasury selloff and keep rates pointed towards zero.
CONSENSUS: key rate unch at 0.25%, QE3 on hold at $85B/month
PRIOR: key rate unch at 0.25%, QE3 on hold at $85B/month
08/01 Thursday // 01:00 GMT: CNY Chinese Manufacturing PMI (JUL)
Chinese manufacturing data gives an important indicator of economic health especially given the precarious credit environment surfacing over the last two months. Premier Li Keqiang has recently ordered over 1400 companies involved with steel, copper, cement, and paper to cut production capacity. The industry ministry also stated earlier last week that China will accelerate the phase-out of overcapacity in 2H’13.
These recent policy decisions may not fully be reflected in the PMI reading but it does create the notion that the Chinese government is certainly willing to sacrifice growth to control overextended parts of the economy, which is negative for Chinese-related currencies like the Australian and New Zealand Dollars.
The key pairs to watch are AUDJPY and AUDUSD.
08/01 Thursday // 11:00 GMT: GBP Bank of England Rate Decision
As was made clear by the inclusion of a policy statement and forward guidance at the July 4 meeting, the intention of Governor Carney had been to clarify policy and be more transparent; the desired end result is to let market participants know that UK interest rates will be kept lower for the foreseeable future.
Yet the reaction seen in the GBPUSD these past four weeks says that ‘no additional easing’ from Carney equates to ‘tightening.’ The BoE will take note and should they recalibrate quickly at the August meeting, the Sterling will give back recent gains.
CONSENSUS: key rate unch at 0.50%, APT unch at £375B
PRIOR: key rate unch at 0.50%, APT unch at £375B, introduction of policy statement and forward guidance
The key pairs to watch are EURGBP and GBPUSD.
08/01 Thursday // 11:45 GMT: EUR European Central Bank Rate Decision
The ECB will announce its latest monetary policy considerations just forty-five minutes after the BoE on Thursday. While a Bloomberg News survey widely expects the ECB to maintain its benchmark interest rate at 0.50%, the market will be paying more attention to ECB President Mario Draghi’s press conference for clues as to where the ECB is heading next.
In recent press appearances, ECB President Draghi has declared the ECB’s intention to keep rates at a low rate for a prolonged amount of time, more or less the introduction of forward guidance. Draghi also spoke about the consideration of implementing a negative deposit rate, an unprecedented move in the world’s largest economies. While this option is possible, it is highly unlikely in the short-term. A hold should be Euro positive.
CONSENSUS: key rate unch at 0.50%, no new measures
PRIOR: key rate unch at 0.50%, introduction of forward guidance
The key pairs to watch are EURGBP and EURUSD.
08/02 Friday // 12:30 GMT: USD Change In Nonfarm Payrolls and Unemployment Rate (JUL)
In recent months, the Fed has stated its desire to achieve average monthly payroll growth of +200K before considering winding down QE3. The six month jobs average is there, now at +201.8K, signaling above trend growth in the medium-term.
In light of weekly labor market indicators improving alongside consumption and the ISM employment sub-indexes, we should see the July NFP report challenge +200K once more; and the Unemployment Rate should drop down to 7.5%.
Given event risk ahead of Friday, the US Dollar might need a strong print just to make it out of the week; the central bank meetings from Tuesday to Thursday alone could set a weak dollar precedent.
CONSENSUS: +185K, 7.5%
PRIOR: +195K, 7.6%
The key pairs to watch are EURUSD and USDJPY.
--- Written by Christopher Vecchio, Currency Analyst and Kevin Jin, DailyFX Research
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