Week Ahead: FOMC, ECB, BoJ meetings plus US CPI.

It’s a huge week in store for markets as we get three major central bank meetings, including the FOMC, as well as the release of the latest US CPI data which will potentially direct price action and determine how the Fed reacts. Other top tier economic releases include UK wage growth and employment figures, and US retail sales which will highlight how the all-important US consumer is coping with higher interest rates and still elevated inflation.

May’s US CPI print is seen rising only moderately with the annual headline reading falling nearer to 4% from 4.9%. This number hit 9.1% last June so the drop has been welcome and driven by sharp declines in energy and commodity prices. But food inflation remains sticky and it is the core which will be key. If the monthly figure rises more than 0.4%, then the dial for the consensus call of an unchanged FOMC call may shift towards a 25bp rate hike the following day. Gold could test strong support at $1935/41 in this scenario.

Economic activity in the US has continued to remain resilient with a still hot labour market and other central banks also staying hawkish by surprisingly raising rates due to high inflationary pressures. But the idea of the Fed “skipping” this meeting to assess the impact of 500bps of policy tightening in just 14 months, the most in over 40 years, has gained traction recently with a rate hike more likely at the Fed’s late July meeting. There will surely be an intense debate on the FOMC with the Fed most likely wanting to remain data dependent and vigilant about hot inflation and the jobs market.

The ECB and BoJ are more obvious calls with the former nailed on to hike rates. Even though recent eurozone data may have disappointed, the ECB is forecast to remain relatively hawkish with markets pricing in at least one more 25bp rate hike after this meeting. So, FX markets will be led by the tone and any forward guidance of President Lagarde at her subsequent press conference. EUR/USD looks to have formed a strong base around 1.07 with the key cycle low at 1.0635. A less hawkish Lagarde will see that troubled but a President warning of more hikes in the pipeline could see the 100-day simple moving average at 1.0806 challenged.

Finally, the Bank of Japan is expected to stand pat once more, disappointing those who wish to see the relatively new Governor Ueda stamp his mark on the bank’s uber-dovish policies. Inflation is near its highest in three decades and economic growth turned positive in the first quarter. But policymakers believe price pressures will likely cool with the global slowdown adding weight to their argument. USD/JPY has been tracking sideways recently between 139 and 140. Recent highs around 140.91/93 act as initial resistance with 142.24/25 a target for dollar bulls if the BoJ indicates that no end is in sight to its loose monetary policy which has been maintained for over 30 years.

Major risk events of the week

13 June 2023, Tuesday

-UK Jobs: Surveys suggest that tightness in the job market is unwinding while pay pressure is easing but remains elevated. That said, some analysts see the headline measure of earnings ticking up as high as 7% due to base effects. Sterling was strong last week with cable pushing up to level last seen in early May. With over 100bps of hikes already priced, the bar is high for an upside surprise.

-German ZEW Business Survey: Data in May pointed to a worsening of the already unfavourable economic situation in the next six months and spurred more recession fears. The indicator actually fell into negative territory for the first time since December and was the third decline in a row. Further ECB rate hikes could continue to dent sentiment further. 

-US CPI: Consensus expects the headline to fall to 4.3% in May from the prior 4.9% and the monthly print to tick lower by two-tenths to 0.2%. The core is seen unchanged at 0.4% m/m and two-tenths lower at 5.3% y/y. Key will be services excluding shelter prices which is a gauge of discretionary demand. 

14 June 2023, Wednesday

-UK GDP: The UK economy grew sluggishly in the first quarter matching forecasts. National strikes and weak retail may continue to weigh going forward, along with high inflation. Key to growth will be sustained strength in the services sector. 

-FOMC Meeting: Money markets currently give a 27% chance of a 25bp rate hike. Recent commentary from officials has been mixed with some highlighting persistent inflation risks while Chair Powell has indicated a willingness to pause and assess the lagged effects of policy tightening. 

15 June 2023, Thursday

-ECB Meeting: Consensus sees the ECB hiking rates by 25bps to take the deposit rate to 3.5%. Core inflation has eased to 6.1% from 7% since the May meeting while inflation expectations have also started to slow. It seems that the ECB is currently determined to err on the side of higher rates and leave the door open for more rate rises to bring inflation back to target within two years. 

-US Retail Sales: The market median estimates a flat reading after 0.4% growth in April. Auto sales may be drag in May. Momentum is forecast to ebb further through this year as sticky inflation, weakness in the housing market and higher rates feed into the economy. 

16 June 2023, Friday

-Bank of Japan Meeting: Expectations are for no change to all policy measures. Governor Ueda recently reiterated that the bank will patiently maintain current monetary policy easing. Most analysts see a potential tweak to the YCC policy band if inflation remains at its current elevated level through the year. 

(Sources: vantagemarkets.com)