FX Markets Look to UK & Japanese CPI; FOMC, RBNZ, & BOE Meetings
- The British Pound appears to be well-positioned to continue its streak of gains versus the Euro and the US Dollar, between the February UK CPI release on Tuesday and the BOE policy meeting on Thursday.
- While the FOMC may upgrade its dot plot and projected path of interest rates (the “glide path”), questions remain over whether or not that will instill enough confidence in traders to rekindle USD-long positions.
- Retail trader positioning remains mixed as measures of volatility continue to stay elevated.
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03/20 Tuesday | 09:30 GMT | GBP Consumer Price Index (FEB)
Consensus forecasts, according to Bloomberg News, are calling to see inflation having increased by +0.5% from -0.5% (m/m) and +2.8% from +3.0% (y/y). Likewise, Core CPI is expected to dip to +2.5% from +2.7% (y/y).Unlike inflation reports in previous months, the upcoming data release doesn’t hold much importance for the Bank of England in the near-term. After all, the coming meeting is one without a Quarterly Inflation Report, which has been the typical precursor to seeing any policy change made. With that said, given that inflation will remain at high levels as real disposable income remains under pressure, the Tuesday report should give plenty of room for the BOE to signal its willingness to raises rates again soon; overnight index swaps are currently pricing in a 70% chance of a 25-bps hike by May.
03/21 Wednesday | 18:00 GMT | USD Federal Reserve Rate Decision and Press Conference
The Federal Reserve’s March policy meetingwill bring a 25-bps rate hike with it, although that much information is already priced-in to rates: Fed funds are implying a 100% chance of a hike. Given that it is a meeting with a press conference and a new Summary of Economic Projections (SEP) meeting, and that it is Chair Jerome Powell’s first press conference, there is a significant risk of higher than usual volatility for the coming FOMC meeting. Even as economic data indicators have suggested growth and inflation should outperform the FOMC’s 2018 forecasts, there still appears to be a high burden of proof in order for market participants to rekindle their affection towards the US Dollar. Even as three and a potential fourth rate hike have come into focus for 2018, the US Dollar remains one of the worst performing major currencies of 2018.
03/21 Wednesday | 20:00 GMT | NZD Reserve Bank of New Zealand Rate Decision
As has been the case for the past several months, the way the RBNZ has the potential to hit the Kiwi is via commentary on the exchange rate. Overnight index swaps are pricing in less than a 5% chance of a rate hike this week; and are pricing in less than a 40% chance of a hike by the end of 2018. The Q4’17 inflation report showed that price pressures remain below the RBNZ’s +2% target, having come in at +1.6% y/y. For now, the RBNZ is seemingly relegated to the sidelines; but verbal rhetoric remains their most likely tool to be used in the near-term.
03/22 Thursday | 12:00 GMT | GBP Bank of England Rate Decision
The March policy meeting will see Bank of England take a similarly calm approach as last month. While policymakers released an updated Quarterly Inflation Report, the main overnight interest rate was held in check at 0.50%. Accordingly, without explicit forecasts due this time around, no policy measures are expected to change. For now, with Brexit uncertainty seemingly finding clarity after the EU-UK transition deal was reached, and that inflation remains stubbornly above +2% y/y, the door is open for the BOE to enact another rate hike when their next QIR is released in May. The language surrounding the BOE’s policy statement on Thursday should prove supportive for the British Pound as a 25-bps hike is queued up.
03/22 Thursday | 23:30 GMT | JPY National Consumer Price Index (FEB)
Japanese inflation figures are expected to continue their push higher, increasing to +1.6% y/y in February from +1.5% y/y in January. While the headline is due to remain well-below the Bank of Japan’s preferred target near +2%, they do represent the fastest rate of price pressures since April 2015 – when Shinzo Abe government enacted the (unpopular) sales tax reform. Nevertheless, should inflation tick higher, expect market participants to speculate over an early termination to the BOJ’s easing policies; the BOJ has recently signaled that the end of the extraordinary easing measures will come around the start of FY2019 – next April. The Japanese Yen, which has been the best performing major currency this year, should remain well-supported.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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