Busy week ahead: What are markets watching this week?

It has been quite the month so far, with rate cuts seen for the European Central Bank (ECB) and the Bank of Canada (BoC).

This week is gearing up to be another eventful calendar for policy watchers, welcoming three updates from the Reserve Bank of Australia (RBA), the Swiss National Bank (SNB) and the Bank of England (BoE). In addition, we have a generous gathering of macroeconomic indicators to monitor.

The RBA: Likely to remain on hold based on data

The RBA’s policy meeting is scheduled to air on Tuesday at 4:30 am GMT.

It is no secret that the RBA’s Board is expected to remain on hold at 4.35% (12-year peak) for a fifth consecutive meeting this week and likely communicate that it had discussed raising the Cash Rate. According to the OIS market, the central bank is forecast to remain at current levels into 2025. Also of note, rate hike expectations have now been priced out.

The RBA is expected to leave rates on hold for a longer period of time than the Fed. You will recall that last week, the FOMC left the Fed funds target range on hold at 5.25%-5.50%. As per the Summary of Economic Projections (SEP), the central bank now expects just one rate cut this year (down from three in the last SEP report).

Anaemic growth in Q1 this year – GDP rose +0.1% in Q1 and +1.1% year on year – coupled with inflation data showing upside price pressures in the monthly releases (increasing at an annualised pace of +3.6% in April to a five-month peak) and employment change displaying an increase in total employment (+39,700) as well as a decline in unemployment from 4.1% to 4.0%, poses an interesting economic landscape for the RBA.

Consequently, the focus at this week’s meeting will be on the rate statement language and the press conference. The previous meeting’s rate statement repeated that the Board ‘remains resolute in its determination to return inflation to target’, though it added: ‘The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out’.The central bank also revised its GDP growth and unemployment forecasts for 2024 to 1.2% (from 1.3%) and 4.0% (from 4.2%), respectively, though it revised CPI inflation higher to +3.8% (from 3.3%).

Given upside risks in inflation, slowing growth, and renewed strength in the labour market, a rate hike is still not off the table, despite market pricing. However, given the subsequent minutes from the meeting (which noted that a rate hike was discussed) and commentary from policymakers, any hawkish language change in the accompanying rate statement or press conference would likely underpin the AUD against G10 peers.

The BoE: Unlikely to cut ahead of the general election

The BoE is set to meet on Thursday this week at 11:00 am GMT. The country is now in the middle of a General Election, which has made trading this event a little more challenging as the central bank is unlikely to make much of a move ahead of the General Election to avoid confusion.

OIS traders are pricing less than a 5.0% chance of a rate cut at this week’s meeting, leaving the Bank Rate unchanged at 5.25% for a seventh consecutive meeting (16-year high). At the time of writing, August’s meeting is still about 50/50 for a hold or a cut, with markets leaning more towards a cut in either September or November. For the entire year, -46bps of easing is priced in (just under two rate cuts).

You will recall from the previous meeting that Deputy Governor David Ramsden joined external MPC member Swati Dhingra, voting in favour of a 25bp cut. This did not raise too many eyebrows and was largely expected, though it was a dovish cue. Regarding the updated BoE projections, inflation and unemployment were downgraded, and growth was upgraded.

On the data front, since the last BoE meeting, headline nominal inflation cooled to +2.3% in the twelve months to April, a 1 percentage point drop from +3.2% in March and higher than the +2.1% expected. Core inflation – strips out energy and food components – also came in higher than expected and remained stubbornly high year on year at +3.9% versus the +3.6% estimate (prior: +4.2%) and services inflation, a metric that the BoE is keeping a close eye on, came in stronger than expected at +5.9% versus +5.5% expected (prior +6.0%). Note that the May CPI inflation data will be released a day before the BoE decision on Wednesday. Year-on-year headline inflation is expected to slow from +2.3% in April to +2.0% in May, with the core year-on-year measure expected to slow to +3.5% from +3.9%. However, it must be said that should inflation come in as expected and CPI inflation returns to the +2.0% target, it is unlikely this will sway policymakers enough to cause much change in voting but could see altered language in the rate statement.

In other data, unemployment rose to 4.3% in the three months to April (the highest rate since late 2021), and wage growth remains elevated at 5.9% (including bonuses) and 6.0% (regular pay) over the same period.

Much like the RBA meeting, attention will be on the rate statement for the BoE meeting as to the timeline for rate cuts and the MPC votes. Any significant change in either is likely to elevate volatility in GBP currency pairs and domestic markets.

The SNB

The SNB is up at 7:30 am GMT on Thursday this week. Following the surprise rate cut in March, which brought the Policy Rate from 1.75% to 1.50%, traders are betting that the central bank could step up again and cut by another 25bps.

The OIS curve implies a 72% chance of another rate cut unfolding (-18bps priced in); investors increased their bets of a rate following the latest inflation prints coming in line with market expectations. Any language change or shift in bias at the press conference will also be widely watched.

G10 FX (five-day change):