FX Week Ahead - Top 5 Events: Fed Meeting; BOE & ECB Rate Decisions; Canada Inflation Rate; Australia Jobs Report

FX Week Ahead Overview:

• Central banks are squarely in focus this week, with the Federal Reserve, Swiss National Bank, Bank of England, European Central Bank, and Bank of Japan releasing their final rate decisions of 2021 in the coming days.
• Inflation data are in focus too, with releases from Canada and the UK this week (though, the latter of which will be overshadowed by the BOE meeting).
• Jobs data from Australia should prove to be the biggest market mover for the commodity currencies; the Reserve Bank of Australia has recently abandoned its yield curve control policies and is signaling the end to QE in early-2022.

For the full week ahead, please visit the DailyFX Economic Calendar.

12/15 WEDNESDAY | 13:30 GMT | CAD Inflation Rate (NOV)

According to a Bloomberg News survey, the November Canada inflation rate (CPI) is forecasted to hold steady at +4.7% (y/y), while the core reading is due in at +3.6% from +3.9% (y/y). The continued elevation in these figures – despite some early signs of disinflation – should serve as reinforcement to the Bank of Canada’s recent rate decision that had undertones of hawkish policy forthcoming. Such data may prove to be a benefit to the Canadian Dollar, as early-2022 rate hike expectations are bolstered.

12/15 WEDNESDAY | 19:00 GMT | USD Federal Reserve Rate Decision & Press Conference

Per Eurodollar spreads, there are 146.75-bps of rate hikes discounted through the end of 2023 while the 2s5s10s butterfly is just off of its widest spread since the Fed taper talk began in June (and its widest spread of all of 2021). Ahead of the December Fed meeting, rates markets are effectively pricing in a 91% chance of five 25-bps rate hikes over the next two years – not significantly changed from prior to Thanksgiving, when Fed Chair Powell’s more hawkish commentary emerged.

In order to achieve such a rate lift off, the Federal Reserve will likely need to begin rate hikes by mid-2022. As such, consistent with comments made by Fed Chair Powell as well as incoming Fed Vice Chair Lael Brainard, it seems more likely than not that the FOMC will announce an accelerated timeline to taper its QE program, increasing the rate of tapering from $15B/month to $30B/month beginning in January 2022. This would end the Fed’s QE program in March 2022, allowing for the first 25-bps rate hike by June 2022.

12/16 THURSDAY | 00:30 GMT | AUD Employment Change & Unemployment Rate (NOV)

The Australian economy may have finally emerged from its pandemic depths as rather draconian lockdowns come to an end. According to a Bloomberg News survey, the Australian economy gained an astounding +205K jobs in November, a significant turnaround from the bleak reading of -46.3K jobs lost in October. The Australian unemployment rate is expected to fall bank from 5.2% to 5%. Such a reading would give the Reserve Bank of Australia a much-needed shot of confidence to ends its QE program in February 2022 – for which it has already started to lay the groundwork.

12/16 THURSDAY | 12:00 GMT | GBP Bank of England Rate Decision

The Bank of England has played a game of cat and mouse with financial markets in recent months, having suggested that the first rate hike would arrive in November, only to disappoint. But with UK Prime Minister Boris Johnson suggesting that a “tidal wave” of omicron variant infections was about to hit the UK economy, the BOE’s Monetary Policy Committee may find that it is prudent to stay in ‘wait-and-see mode’ for another few months before embarking on its rate liftoff.

Markets are evenly priced in terms of a hold or a 15-bps rate hike, meaning approximately half of market participants have it wrong – in other words, the BOE meeting should produce volatility in GBP-crosses, no matter what the outcome.

12/16 THURSDAY | 12:30 GMT | EUR European Central Bank Rate Decision & Press Conference

As questions grow around the Eurozone’s growth trajectory, elevated inflation measures are sending Eurozone real yields lower, representing an albatross on the Euro’s proverbial neck. And yet, the European Central Bank doesn’t appear poised to act soon. ECB President Christine Lagarde recently stated that the inflation looks like a “hump,” suggesting that it will soon fall back again.In other words, as other central banks like the Federal Reserve or the Bank of England are readying to tightening policy, the ECB continues to sit on its hands. And for the foreseeable future, that leaves the Euro at a disadvantage relative to the other major currencies.

--- Written by Christopher Vecchio, CFA, Senior Strategist