FX Markets Eye ECB and BOJ Meetings, Q1'18 UK and US GDP
- The top event of the week is on Thursday when the ECB meets for its April policy meeting.
- Friday sees a BOJ meeting as well as both of the initial Q1'18 UK and US GDP releases.-
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04/24 Tuesday | 01:30 GMT | AUD Consumer Price Index (1Q)
First quarter inflation figures for Australia are expected to see a modest rebound higher this week, from +1.9% to +2.0% (y/y). But given the predominant stance of the Reserve Bank of Australia at present time – one of patience and desire to see further improvement in growth conditions – it would appear unlikely that the inflation print will lead to a significant rebound higher by the Australian Dollar. Presently, Australian cash rate futures are pointing to only a 26% chance of a rate hike by the RBA’s December meeting. The bigger risk to the Australian Dollar this week, and indeed the Australian economy overall per commentary made by RBA Governor Lowe, would be a continued push higher by US interest rates.
04/26Thursday | 11:45 GMT | EUR European Central Bank Rate Decision
Even though the European Central Bank policy decision on Thursday will not bring forward a new set of Staff Economic Projections, odds remain high that ECB President Mario Draghi will use his platform to outline a more dovish tone moving forward. Part of the reason for disappointment in some of the data and inflation expectations in recent weeks can be attributed directly to the Euro itself: it remains up by more than +9% year-over-year on a trade-weighted basis. The stronger the Euro is relative to its peers, the less appealing Eurozone exports appear, plain and simple.
Accordingly, despite no new projections being set forth, we expect that Draghi & co. will outline a more dovish set of expectations moving forward via the press conference held following the rate decision itself – a rate decision that will see no change in rates. In fact, looking at overnight index swaps, there is a 25% chance of a rate move by the end of 2018, but rates markets aren’t pricing in a policy change in earnest until at least Q3’19.
A small shift in language by the ECB could undermine the Euro as market participants remain net-long. According to the CFTC’s COT report for the week ended April 17, there were +146.4K net-long contracts held by speculators, up from +133K the week prior. Net-longs are near their highest level ever set during the week ended January 30 at +148.7K contracts. At this juncture, it will be much easier for the ECB to do something that pushes the Euro down than it will be for the Euro to stay elevated.
04/27Friday | --:-- GMT | JPY Bank of Japan Rate Decision
The Bank of Japan may walk back some of the relatively hawkish commentary made since the end of March following the release of the March inflation report last week. The National Consumer Price Index came in at +1.1% from +1.5% in March, highlighting the extent to which the BOJ needs to continue to keep its foot on the pedal for its easing program. Any such discussion by BOJ Governor Kuroda that remains centered on pulling back the central bank’s extraordinary easing efforts around the start of fiscal year 2019 (next April) would be seen as hawkish in light of recent data.
04/27Friday | 08:30 GMT | GBP Gross Domestic Product (1Q A)
The British Pound enters this week reeling following commentary made by Bank of England Governor Mark Carney last week. The BOE chief noted that recent economic data has been uneven, prompting speculation that a 25-bps rate hike in May is not a sure thing after all. BOE May rate hike odds have dropped from near 85% to below 50% in the three days following his remarks. Certainly, the upcoming GDP report may not inspire the confidence needed to reinvigorate expectations: the initial Q1’18 GDP release is expected to show growth of +1.4% annualized, just as it did in Q4’17. Although due to be released at the end of the week, the report will be the determining factor for whether or not the British Pound finishes positive or negative this week.
Pairs to Watch: EUR/GBP, GBP/JPY, GBP/USD
04/27Friday | 12:30 GMT | USD Gross Domestic Product (1Q A)
Growth expectations for Q1’18 US GDP are fairly divergent, depending upon where you look. The New York Fed’s Nowcasting report sees growth coming in at +2.9% while the Atlanta Fed’s GDPNow estimate sees growth due in at +2.0%. The source of the divergence is discernible, however: the NY Fed model includes ‘soft data’ like consumer confidence while the Atlanta Fed model does not. Needless to say, with sentiment readings near multi-year highs, there’s an obvious reason why the NY Fed’s estimate is higher than the Atlanta Fed’s. As such, we’re partial to think the Q1’18 GDP reading is going to land closer to +2.0%. Such a reading may prove problematic for the Federal Reserve, given that the March CPI report showed inflation at +2.4% (y/y): stagflation-like conditions are starting to emerge as real GDP growth is set to turn negative.
Pairs to Watch: EUR/USD, GBP/USD, USD/JPY, Gold
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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