A busy week awaits, despite US data taking a back seat: The Week Ahead

US data takes a step back from the limelight to make way for inflation reports from the UK, Canada, New Zealand, and Japan. And throw in an ECB meeting, Australian employment report and the CCP's Third Plenum for good measure.

The combination of Canada’s quarterly business outlook report and CPI could sway expectations for another BOC cut, which the central bank was reluctant to signal at their last meeting. New Zealand’s quarterly inflation report will put the RBNZ’s relatively dovish meeting to the test, given they have just lowered their own outlook for CPI. Strong output data from the UK likely requires quite the undershoot with their own CPI figures next week to deter GBP/USD bulls. And the same could be said for Australia’s employment report, as rising inflation has put traders on alert for another RBA hike. China watchers have the CCP’s Third Plenum in the first half of the week which could make an impact on APAC (if not global) sentiment, should any significant reforms be announced.

The Week Ahead: Calendar

The Week Ahead: Key themes and events

• China’s Communist Party Third Plenum
• Australian employment report
• Inflation reports for the UK, Canada and Zealand
• ECB interest rate decision
• Fed members speaking ahead of the blackout period
• US earnings season

China’s Communist Party third Plenum (Monday – Wednesday)

Around 400 of China’s top officials will meet next week for the third Plenum, which is arguably the biggest annual policy meetings of the year. President Xi Jinping talked up his plans for “a series of major measures” back in June, and this would be the ideal time to announce them. Expectations of major policies seem to be quite low, but if reforms beat low expectations and deemed adequate enough to boost growth, it could provide a lift in sentiment.

Trader’s watchlist: China A50, Hang Seng, AUD/USD, AUD/JPY

Canadian Business outlook, inflation (Monday, Tuesday)

The BOC pays close attention to the business outlook report, and the Q2 report will be released on Monday. Firms reported weak demand overall in Q1, and inflation expectations are declining, although high wage costs were keeping output price growth elevated. Fifty-two percent of firms also reported cost pressures as a concern for business, which was the second-highest concern behind uncertainty. Clearly, cost pressures (and concerns of them) need to recede much faster for the BOC to consider cutting rates again.

The Bank of Canada (BOC) cut their cash rate by 25 bps to 4.75% in June but warned that cutting rates too quickly could jeopardize their fight against inflation. However, BOC governor Tiff Macklem said that the central bank is going to take things ‘one meeting at a time’, so if data rolls over next week, then bets of another cut could be revived.

Traders will also keep a close eye on inflation data released on Tuesday to see if the sudden rise in May was simply a blip, or the beginning of another round of inflation.

The 1-month OIS currently implies a 28% chance of a cut at their next meeting, and we have to look as far as 6 months before a 25 bp cut is fully priced in.

Trader’s watchlist: USD/CAD, EUR/CAD, AUD/CAD, CAD/JPY

New Zealand inflation (Tuesday)

The RBNZ did quite the U-turn at their last meeting, by walking back the hawkish twist they introduced at their previous cash rate announcement. They now think inflation will fall back within their 1-3% target by the end of 2025 and have removed any reference to discussing a rate hike. The Q2 inflation report, released on Tuesday (GMT) or Wednesday local time, will provide a test of confidence in the RBNZ’s renewed optimism for the fight against inflation. If CPI data can soften enough, it could weigh further on the New Zealand dollar and lend additional support to AUD/NZD, which enjoyed its best day of the year after the RBNZ’s slightly dovish meeting.

Trader’s watchlist: NZD/USD, NZD/JPY, AUD/NZD

UK inflation (Wednesday):

Over the past few days, we have heard the Bank of England’s chief economist flirt with the discussion of rate cuts, alongside better-than-expected output figures, which have sent GBP/USD to a 12-month high. Clearly, markets are paying greater attention to incoming data over BOE officials’, and with good reason given the multiple times the BOE has tried to talk a dovish game only for the economy to outperform expectations.

Inflation data on Wednesday, therefore, warrants a close look. Whilst the headline CPI figure finally tapped the BOE’s 2% target, core CPI remains at 3.5% and may need to dip a lot closer to 3% to rekindle hopes of a BOE cut any time soon.

Trader’s watchlist: GBP/USD, GBP/JPY, EUR/GBP, FTSE 100

Australian employment report (Thursday)

The strong labour market in Australia has been a key reason that the RBA have been unable to switch to a dovish tone, when inflation was falling. Yet the rise of inflation this year prompted then RBA to discuss a potential hike at the last two meetings. And if employment heats up from here, it simply means that the odds of another RBA hike increase.

The RBA’s 30-day cash rate future contract implies a 22% chance of a hike at their next meeting, down from 40% just over two weeks ag.

Trader’s watchlist: AUDUSD, AUD/JPY, AUD/NZD, ASX 200

ECB interest rate decision (Thursday)

The European Central Bank (ECB) are very unlikely to cut their interest rate next, and it is not all that clear they have a good enough case to in September. Headline inflation is moving lower yet services and wage growth remaining stubbornly high and the labour market remains strong. It therefore seems likely that the ECB will keep their cards close to their chest and refrain from signalling a September cut. And with US data continuing to soften, it leaves the potential for further upside for EUR/USD.

Trader’s watchlist: EURUSD, USD/JPY, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, Dow Jones, VIX, bonds

Fed members speaking ahead of the blackout period (Thursday)

This is the final week before Fed members enter their media blackout period, which scheduled between July 20^th to August 1^st. For now, we just have two FOMC members speaking: Bowman on Thursday July 18^th at 23:30 GMT, And Bostic on Friday 19^th at 16:45. Given there is not a huge amount of US data, we may already have full-drawn conclusions as to what the Fed will do in September. After all, doves have been handed a full house of weaker economic data including soft CPI, PCE, NFP and ISM reports. The question now becomes whether they will continue to push back on a September hike next week, or dangle to dovish carrot. My guess is the latter.

US earnings season

• Tuesday: Blackrock, Goldman Sachs
• Wednesday: UnitedHealth, Bank of America, Morgan Stanley, Charles Schwab
• Thursday: Johnson & Johnson, United Airlines

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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