FOMC, BOJ, BOE take the reigns of market drivers: The Week Ahead

To think this time last week, Joe Biden was still running for reelection. But my hunch that he’d pull out of the race over the weekend played out, and Kamala has taken his spot. It may not be a radical overhaul where policies are concerned, but it has certainly brought the Democrat’s prospects for maintaining power back from the brink of death. From a market perspective, it means Trump is no longer a ‘walk in’ President, and political headlines from the US are no longer driving sentiment for now.  Thankfully, we have intertest rate decisions from the FOMC, BOE and BOJ, along with NFP and Australia’s CPI report for good measure.

The Week Ahead: Calendar

The Week Ahead: Key themes and events

• FOMC meeting and press conference
• BOJ meeting
• BOE meeting
• US nonfarm payrolls
• Australian inflation report

Wednesday: Australian inflation report

Traders appear less concerned of another RBA hike than they were a few weeks ago. While the monthly inflation gauge and employment figures are keeping the RBA hawks on their toes, some of the pressure has been alleviated with a dovish Fed and RBNZ. Cash rate futures for the RBA to hike by 25bp in August have fallen to 20%, down from around 44% a few weeks back.

But if there is anything that could rekindle bets of a hike, look no further than Australia’s Q2 inflation report next week.

Trimmed mean CPI rise 4% y/y in Q1, well above the RBA’s 2-3% target band. It also rose 1% q/q, up from 0.8% in Q4. But there may be hope that the data could come in soft looking at New Zealand’s latest quarterly report, as the two tend to track one another over the longer term. Of course, should CPUI data come in hot and rekindle rate-hike bets, AUD/USD might be able to drag itself up from its lows after enduring its worst bearish run of 8-day since the Pandemic.

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

Wednesday: Bank of Japan (BOJ) meeting

Once again, we head into a BOJ meeting with speculation of a BOJ hike. Similar scenarios have only led to disappointment this year, but perhaps this time odds of a hike could be higher. ‘Sources’ told Reuters earlier this week that the BOJ are weighing up the potential to hike, and that they will unveil a detail plan to halve ETF purchases over the coming years. The government is also pushing for wage hikes and for the BOJ to normalise faster, according to a Nikkei report on Monday.

The BOJ would likely hike by a mere 10bp if they are to at all. So with the yen surging this week on risk-off flows and rate-hike bets, the 10bp hike could already be priced in. And that could lead to a weaker yen (and higher USD/JPY) if they don’t hike at all. 

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

Wednesday: FOMC meeting and press conference

No change of policy is expected from the Fed at their meeting on Wednesday, even if there are some calling for July cut. We know the Fed like to guide market expectations ahead of any decision, and as of yet they have not signalled the September cut that markets have already conveniently priced in. And next week’s meeting could be the ideal opportunity to signal such a move.

We have no staff forecasts to look forward to, but we do have Jerome Powell’s press conference which is likely to be where any September signal. Assuming the statement hasn’t spelled it out already.

Should the Fed provide no adequate signal of forthcoming cuts next week, Fed members will have the entirety of August to prep markets for expectations of the September, November and December meetings. But with markets pricing in three cuts by the end of the year, the Feed either need to act now or signal they are to do so at the next meeting to avoid a rise in yields and the US dollar.

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

Thursday: Bank of England (BOE)

There is speculation that the BOE could cut their cash rate by 25bp on Thursday. It would reduce their cash rate to 5% and mark their first cut of this cycle, and since the pandemic. Futures markets imply a 51% chance of a cut next week and two cuts by the end of the year. So if the BOE hold rates steady, the September meeting is likely to be live.

An indication of appetite to cut twice this year could be revealed in the ‘MOC votes to cut’. If there really is merit to two cuts this year, we’d likely need to see at least four vote for a cut on Thursday (there are nine votes total), up from two previously. And if they decide to cut, traders will want to hear clues of further cuts in the statement. Otherwise the British pound could see further gains given the fact that GDP, inflation and PMIs have all beaten expectations recently.

Another theme for GBP/USD traders to monitor outside the meeting is market positioning, given net-long exposure reached a record high last week.

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

Friday: US nonfarm payrolls

US job growth and earnings are trending lower, unemployment higher, none of which at an alarming rate. Inflation and PMIs are also softening, and the advanced GDP report for Q2 came in better than expected. Overall, this plays very nicely with the Fed’s soft landing theme which tends to weigh on the US dollar.

Still, should unemployment rise to 4.2% or higher with softer job growth and earnings, it should bolster bets of multiple Fed cuts. And the faster these key metrics unravel, the closer we move towards the unwelcomed ‘hard landing’. And that could make more of a ripple in US stock markets which are already feeling the strain of disappointing earnings. Incidentally, hard landing is likely a US dollar bull story as it returns as a safe haven.

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

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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