Week ahead: CPI rates, PMI figures and RBA to move the markets

The week is drawing to a close and we open a window at what next week has in store for the markets. On Monday, from China we get the Urban investment, industrial output, and retail sales growth rates for April, while from the Euro Zone we note the release of the final HICP rates for the same month. On Tuesday we get from China PBOC’s interest rate decision, from Australia RBA’s interest rate decision, Canada’s CPI rates for May and Euro Zone’s preliminary consumer confidence indicator for May. On Wednesday we get New Zealand’s trade data for April, Japan’s Tankan indexes for May and trade data for April as well as UK’s CPI rates for the same month. On Thursday we highlight the release of the preliminary PMI figures for May of Japan, France, Germany, the Euro Zone as a whole, the UK and the US, while we also get Germany’s Ifo indicators for May, UK’s CBI indicator for trends in industrial orders also for May, as well as the US weekly initial jobless claims figure. On Friday, we get Japan’s CPI rates for April, Germany’s detailed GDP rates for Q1, UK’s retail sales for April and Nationwide House Prices for May and to finish off the day, Canada’s retail sales for March.

USD – Fundamentals to lead the greenback

On a fundamental level the USD tends to feed on the positive market sentiment created by the announcement of the US-Sino trade deal. In our opinion the deal improves the economic outlook for the US and any further signals of thawing of the tensions in the US-Sino relationships could support the USD further.  

On a monetary level, the Fed seems to maintain its doubts about the necessity of extensive rate cuts until the end of the year. It’s characteristic that the market readjusted its expectations and is currently expecting the bank to cut rates twice before the year ends. Should we see further signals from Fed policymakers contradicting the market’s expectations, we may see the USD getting some support and vice versa.

On a macroeconomic level we note that the US CPI rates for April, slowed down only marginally and that was at a headline level, while on a core level remained unchanged. The release tended to imply that inflationary pressures remained present in the US economy in the past month. Yet the considerable slow down of the PPI and retail sales growth rates for the same month tend to tell a different story. Should we see the market’s expectations for an easing of inflation in the US economy being enhanced in the coming week, we may see the USD slipping, as it could also enhance the market’s expectations for the Fed to start cut rates earlier. 

Analyst’s opinion (USD)

"Given the only few high impact financial releases from the US in the coming week, we tend to focus mostly on fundamentals. On the one hand the expectations for further cooling of inflation tend to weigh on the USD, yet the prospects of a more comprehensive and permanent US-Sino trade deal may outweigh such worries and continue supporting the USD, as could also a possibly more hawkish Fed. "

GBP – CPI rates in focus

We make a start for pound traders by noting that on a macroeconomic level, the preliminary UK GDP rate for Q1, accelerated beyond market expectations which is a positive sign for growth in the UK economy. On the flip side UK’s employment data for March may have been disappointing as despite the unemployment rate remaining steady at 4.5%, the employment change figure dropped beyond market expectations, implying a relative weakness of the UK economy in creating new jobs. In the coming week we highlight the release of the UK CPI rates for April and a possible slowdown could weigh on the pound as it could enhance BoE’s dovish intentions.

On a monetary level, the market’s expectations for BoE tend to be dovishly inclined as another two rate cuts are expected by the end of the year. Yet BoE policymakers after the rate cut delivered in the bank’s latest meeting, tend to highlight the scenario of rates remaining high for longer as inflation may prove to be more persistent than expected. Further such comments by BoE policymakers in the coming week, should they occur, may contradict market sentiment, thus providing support for the pound, while dovish comments could weigh on the sterling.

On a fundamental level, the recent US-UK trade deal is a positive step for the pound, yet seems to be insufficient. We note that the trade deal has annoyed Beijing, and may create some tensions in the Sino-UK trade relationships. Hence the price the UK may have to pay for the US-UK deal, may prove to be larger than expected. We would also like to note the possibility of an improvement of the EU-UK trade relationships, a scenario that could provide some support for the pound. 

Analyst’s opinion (GBP)

“Overall we see the release of April’s UK CPI rates being the highlight for pound traders in the coming week and a possible acceleration could provide some support for the pound as it may add more pressure on the BoE to proceed even more cautiously with rate cuts. On the flip side, a possible easing of inflation may enhance market expectations for more rate cuts  by the bank thus weighing on the pound.”

JPY – A week full of financial data

On a macro level we note that the contraction of the Japanese economy as noted by the release of Japan’s preliminary GDP rate for Q1, does not pose well for it’s outlook. In the coming week, the release of the Tankan indexes for May could ease market worries somewhat should the readings rise. We also note the release of Japan’s preliminary PMI figures also for May, yet the main point of interest is expected to be the release of Japan’s CPI rates for the past month. A possible acceleration could provide some support for JPY as BoJ’s hawkish orientation could intensify.

On a monetary level the summary of opinions of the bank’s last meeting tended to imply some hesitation for the bank’s hawkish direction. It’s understandable that given the wide uncertainty deriving from US President Trump’s tariff policy. Yet as one member stated that the bank should not be too pessimistic, and it will be required to conduct monetary policy in a nimble and more flexible manner, such as by conducting further policy interest rate hikes in response to policy changes in the United States. We tend to agree with that statement at the current stage and expect that should we see more signals from BoJ policymakers pointing towards more rate hikes we may see the Yen getting some support and vice versa.

On a deeper fundamental level, maybe the most interesting feature of JPY over the past week, was its safe haven status in the international markets. The announcement of the US-Sino trade deal tended to ease market worries and create a more risk oriented approach by the market thus weighing on the JPY. Should we see market worries easing further it could lead to further losses for the JPY, while on a fiscal level, talk for high fiscal expenditure tends to be supportive for the Yen.  

Analyst’s opinion (JPY)

“Despite financial data seldomly tend to be major market movers for JPY, we note that the coming week is packed with high impact financial releases with the crown being Japan’s CPI rates for April on Friday. Until then we expect JPY’s status as a safe haven to be the key driver behind the Japanese currency’s direction.”

EUR – May’s preliminary PMI figures to move the EUR

On a fundamental level, we note the war in Ukraine as a key issue for EUR traders. Despite not being optimistic, we have to note that should any progress towards a ceasefire be achieved in the Russian Ukrainian negotiations in Turkey over the weekend, we may see the EUR getting some support. Another issue for EUR traders is the US-EU trade tensions and despite the US willingness to proceed with negotiations, the Europeans seem to be in no hurry. Any escalation of the trade tensions between the US and EU could result into a weakening of the EUR at the current stage.

On a monetary level, we highlight the market’s dovish expectations for the ECB as it expects the bank to deliver another two rate cuts until the end of the year. Yet despite the market expectations we tend to be uncertain, as the US tariffs may create an excess supply thus creating disinflationary pressures in the Euro Zone. On the flip side the US tariffs may raise the general price level, thus easing the need for two rate cuts. Such doubts were expressed also by ECB board member Schnabel and any similar comments in the coming week contradicting current market expectations for the necessity of a rate cut in the bank’s next meeting could provide support for the common currency.

 On a macro level we note the release of the preliminary PMI figures for May with a special interest being placed on Germany’s manufacturing sector figure. Should the indicator’s reading improve we may see some support for the common currency while should Euro Zone’s  Composite PMI figure rise if compared to the last release, implying a faster expansion of economic activity across sectors in the area, despite any possible short comings by Germany, we may see it also playing a supportive role for the EUR. 

Analyst’s opinion (EUR)

“We note the fundamental issues mentioned before as important especially the US-EU trade relationship, yet in the coming week, we intend to focus also on the release of the preliminary PMI figures and a possible rise of the indicators’ readings could provide some support for the EUR. ”

AUD – A rate cut by RBA next week may not be sufficient to weaken the Aussie

On a macroeconomic level, we note the tightening of the Australian employment market in April, as the unemployment rate remained unchanged at 4.1%, but the employment change figure unexpectedly skyrocketed to 89k instead of dropping. We also note that the growth rate of wages of the 1st quarter of the year accelerated implying that the Australian employment market may feed inflationary pressures in the Australian economy. Overall the news may cause some hesitations in RBA’s next meeting this coming Tuesday.

For the time being the market seems to expect the bank to deliver a rate cut of 25 basis points and currently AUD OIS imply a probability of 97% for such a scenario to materialise. Yet a simple 25 basis points rate cut may not be enough for a weakening of the Aussie market as it has almost fully priced in such a scenario and expects another two rate cuts until the end of the year. Should the bank also imply in its forward guidance that more rate cuts are in the pipeline, indirectly justifying the markets expectations we may see the Aussie slipping. On the flip side should the bank fail to signal more rate cuts to come thus contradicting the dovish market expectations, the rate cut may turn into a hawkish rate cut, thus supporting the AUD.

On a fundamental level, we note that the improvement of the market sentiment created by the US-Sino trade deal, may have provided some support for the AUD, given also the market’s perception of AUD as a riskier asset, as it’s a commodity currency. Hence should we see the market sentiment improving further, AUD may benefit. We also tend to focus developments in China and we note the release of high impact data from China on Monday and PBoC’s interest rate decision. Should the data imply an expansion of economic activity and increased internal demand in the Chinese markets, we may see the Aussie also getting some support as the data could imply more exports of raw materials from Australia to China.  

Analyst’s opinion (AUD)  

 “The key issue for AUD may be the market sentiment as a more risk oriented market sentiment could provide support for AUD. Yet on Tuesday we note the release of RBA’s interest rate decision and should the market’s dovishness for RBA be verified or even extended, we may see the Aussie losing ground.”

CAD – Canada’s April CPI rates due out   

On a fundamental level, Loonie traders are expected to maintain their worries for the tensions in the US-Canadian trade relationships and any escalation of those tensions could weigh on the CAD. Overall the election of Mark Carney seems to be providing a sense of fresh air in Canadian politics, with a touch of stability, which may be a positive for the Loonie. Another positive for the Loonie could be a possible rise of oil prices, which does not seem to be the case over the past two days. Yet the oil demand outlook tended to improve and may push oil prices back up, whiel the supply hike tends to weigh on the commodity’s price.

On a monetary level, there is a dovish inclination of the market in regards of BoC’s intentions as it expects the bank to deliver another two rate cuts until the end of the year. Such inclinations may prove to be bearish for the Loonie should they intensify in the coming week.

On a macroeconomic level, we note that April’s employment data may have been a bit disappointing for Loonie traders as the unemployment rate rose beyond expectations. Th release may have intensified the pressure on BoC to cut rates further. Hence we highlight in the coming week the release of Canada’s CPI rates for April and a possible slow down could weigh on the CAD as the dovish expectations fo the market for BoC’s next meeting on the 4th of June may intensify further.

Analyst’s opinion (CAD)

“We see the case for the Loonie to get some support should the market sentiment improve further, or if the US-Canadian trading relationships improve further, or even if oil prices jump back up, yet a possible slowdown of Canada’s CPI rates for April may weigh on the Loonie as it may intensify the market’s expectations the BoC to cut rates in its next meeting ”