Big Week as Risk Trends Settle - RBA, ECB, BoE, and US NFPs On Deck
The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) gained +0.79% last week, making its two-week total +3.42%, its best two-week performance since the weeks ending May 10 and May 17 of this year. Needless to say, the world’s reserve currency has seen continued demand following the Federal Reserve’s June 19 policy meeting, with bouts of strength arriving in tandem with surges in US Treasury yields.
For the week ahead, as this theme plays out, there are several ‘high’ ticket events on the economic calendar that are all but guaranteed to produce excess volatility. Of note, there are three major central bank meetings this week, while the first week of the July (as do all first weeks of the month) presents PMI readings from across the globe. But in terms of the Fed – the most important focus right now – the June US labor market release on Friday, despite holiday trading conditions in the US, is the biggest event on the docket.
Rate Hike Probabilities / Basis-Points Expectations
See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
07/01 Monday // 14:00 GMT: USD ISM Manufacturing (JUN)
US ISM Manufacturing data as of late has been worrying – prints have been declining every month since February signaling slowed growth (and contraction in May (below 50.0) for the first time since November 2012). Despite the apparent slowdown in manufacturing, it is important to remember that the rest of the US economy is showing signs of continued improvement. Of note, consumption, the greatest slice of GDP (just short of 70%), has retained an upward bias in recent months. Given the recent declining trend, a beat on the headline could prove to be significantly bullish for the USD.
07/02 Tuesday // 04:30 GMT: AUD Reserve Bank of Australia Rate Decision
Although the key rate was on hold in June, in May, the RBA cut the benchmark rate to a record low 2.75%, a reminder that the rate cut cycle is still very much in the picture. In the June Minutes, the RBA stated, “the exchange rate [has] also depreciated noticeably, though it [remains] at a high level considering the decline in export prices that [have] taken place over the past year and a half.” While we find another rate cut unlikely at present, further dovish guidance is expected, which could weigh further on the AUD, which fell by -4.69% over the past month against the USD through Friday’s close
07/04 Thursday // 11:00 GMT: GBP Bank of England Rate Decision
The BoE policy meeting on Thursday will be the first in the post-Mervyn King era, with former Bank of Canada Governor Mark Carney taking the reins. It has been long believed that Governor Carney’s ascension would be a consistent bearish influence on the Sterling, given the fact that from December 2012 through February 2013, on several occasions he suggested that central bank policy hadn’t reached its limit and that additional accommodative policies might warrant a consideration.
With that said, despite the 1Q’13 UK GDP figure missing, Governor Carney is unlikely to implement any material or noteworthy policies at his first meeting this Thursday. As expectations for Governor Carney’s stewardship of the BoE are overall dovish, it is possible that a hold might lead to a brief burst higher for the GBP-based pairs.
CONSENSUS: 0.50%; APT at £375B
PRIOR: 0.50%; APT at £375B
07/04 Thursday // 11:45 GMT: EUR European Central Bank Rate Decision
The ECB will decide on Thursday whether to cut its benchmark interest rate even further, past the already record low 0.50%. ECB policymakers have stated hesitance towards cutting this rate and have instead considered implementing a negative deposit rate. In essence, this would charge banks for depositing excess reserves at the ECB which should in turn encourage lending. Theoretically, implementing a negative deposit rate would be bearish for the EUR because it an expansion of money supply causes a currency to devalue. This move, however, is unlikely at the meeting.
The key pairs to watch are EURJPY and EURUSD.
07/05 Friday // 12:30 GMT: USD Change in Nonfarm Payrolls and Unemployment Rate (JUN)
June US labor market data on Friday will give the best insight into when QE tapering mightbegin, as the Fed has continuously reiterated the data contingency of its policies. The Fed has been looking for NFP figures around +200K for several consecutive months to kick start the taper, although such a trend hasn’t materialized; since the +332K reading in February, there has not been a single print above +200K. While the June report should show continued modest growth, given the shift in Fed policy leanings towards the belief that the labor market is improving, another NFP figure in the +160K to +180K should be sufficient to spur a stronger USD.
CONSENSUS: +165K; 7.6%
PRIOR: +175K; 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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