Week ahead: BoC, ECB and May’s US employment report in focus

We are nearing the end of the week and open a window at what next week has in store for the markets. On Monday we get the UK’s Nationwide House prices for May, Switzerland’s GDP rates for Q1 and from the US the ISM manufacturing PMI figure for May. On Tuesday, we get from Australia RBA’s May meeting minutes, China’s Caixin manufacturing PMI figure, Switzerland’s, Turkey’s and the Euro Zone’s inflation metrics for May and from the US the factory orders and JOLTS job openings all being for April. On Wednesday we get Australia’s GDP rate for Q1, the Czech Republic’s preliminary CPI rate for May, the US ADP national employment figure for May and in Canada, BoC is to release its interest rate decision while from the US we get the ISM non-manufacturing PMI figure for May. On Thursday we expect the highlight to be the release of ECB’s interest rate decision while we also get Australia’s trade balance for April, China’s Caixin Services PMI figure, Germany’s industrial orders for April, Sweden’s preliminary CPI rates for May, the Euro Zone’s and the UK’s construction PMI figures for May, the weekly US initial jobless claims figure and Canada’s trade data for April. On Friday, we get Japan’s all household spending, Australia’s building approvals and Germany’s industrial output, all being for April, UK’s Halifax House prices for May, the Eurozone’s revised GDP rate for Q1, Canada’s employment data for May and the highlight of the day, May’s US employment report.    

USD – May’s employment report

On a fundamental level the greenback tended to gain as market worries for US President Trump’s tariff intentions tended to ease. Last Friday Trump announced a 50% tariff on European products only to postpone them for the 9th of July on Monday. Furthermore, on Thursday a US court deemed a wide amount of US tariffs as illegal. The US Government appealed the decision very quickly and officials seem to play down the importance of the decision, which tended to weaken the USD. Yet should there be further signals for an easing of international trade tensions we may see the USD getting further support, while any signs that US President Trump’s tariffs are to remain in effect and not to be reversed, could weigh on the greenback.

On a monetary level, the Fed’s hesitation for more rate cuts seems to be maintained. The release of the Fed’s last meeting minutes mentioned that “participants saw the uncertainty about their economic outlooks as unusually elevated”. The release highlighted the cautious approach of the bank as well as its wait and see stance. Should we see the Fed’s cautiousness be reiterated in the coming week by policymakers, we may see the USD getting some support and vice versa.

On a macroeconomic level we note that the estimate GDP rate for Q1, remained in the negatives, which tends to darken the US economic outlook, yet shift our attention towards the release of the US employment report for May next Friday. Should the data show that the employment market has tightened we may see the USD getting some support, while further easing of the US employment market could add more pressure on the Fed to start cutting rates rather earlier than later thus allowing for the release to weigh on the greenback.  On a monetary level.

Analyst’s opinion (USD).

“Overall we see the case for the US employment report of May to be the highlight of the week for the greenback, yet Trump’s tariff intentions may shake the ground under the US Dollar. Expectations for a possible improvement of the trade relationships especially between the EU and the US could provide some support for the USD. ”

GBP – Fundamentals to lead the pound

Overall fundamentals tended to lead the pound as there were only a few high impact financial releases from the UK over the past few days. We expect that to be maintained in the coming week as well, nevertheless we still would like to note in the coming week the release of the final PMI figures for May, especially for the services sector, as well as the house prices indicators also for May.

On a monetary level, we note the market’s expectations for one, may be two more rate cuts until the end of the year. The stronger than expected CPI rates for April and retail sales rates for the same month may have eased the market’s more dovish expectations. We note the planned speech of BoE’s MPC member Mann next Tuesday as a key issue on a monetary level and a more hawkish tone could provide some support for the sterling while any dovish signals could weigh on the pound.

On a fundamental level, we note the call of BoE Governor Bailey for closer ties between the UK and the EU and given the recent (disappointing US-UK trade deal), that tends to remain the main issue on a fundamental level for pound traders. On a fiscal level, the tight policy of the UK government may be weighing somewhat on the pound.

Analyst’s opinion (GBP).

“Overall we view BoE’s intentions as a key factor behind the pound’s direction in the coming week, while fundamentals from abroad especially the US and the EU could play also an important role.”

JPY – Safe haven flows could affect JPY’s direction

On a fundamental level, we note that we consider at the current stage JPY’s safe haven status in the international markets as a key factor behind its direction in the coming week. Should we see market worries intensifying over the coming week we may see JPY getting some support, while a possible easing of market worries could weigh on the Yen.

We note the acceleration of Tokyo’s CPI rates for May which tend to act as a prelude for the nationwide CPI rates, adding pressure on BoJ to continue hiking rates. Also we note the wide slowdown of the preliminary industrial output growth rate for April despite the slowdown being narrower than expected. In the coming week, there are only a few interesting macroeconomic data which are to be released from Japan, hence we may see fundamentals leading the Yen.   

On a monetary level, we note BoJ Governor Ueda’s call for vigilance for inflationary pressures in the Japanese economy, citing especially food prices. The comment tended to underscore the bank’s hawkish intentions. In the coming week BOJ Governor Ueda is scheduled to speak again on Tuesday and should his hawkish calls be intensified we may see the JPY getting some support.

 Analyst’s opinion (JPY)

“In the coming week we tend to view fundamentals and BoJ’s intentions as the key drivers behind JPY’s direction, with potential safe haven inflows being observed should market worries intensify and vice versa.”

EUR – ECB expected to cut rates

Next week is expected to be a busy one for EUR traders and on a macroeconomic level, we note two high impact financial releases.  EUR traders are expected to focus on two releases. The first is to be the release of Euro Zone’s preliminary HICP rates for May on Tuesday. The rates are expected to slow down and if so could weaken the common currency as the release in such a scenario may imply easing inflationary pressures in the economy of the Euro Zone, adding more pressure on the ECB to cut rates. The second release we highlight is Euro Zone’s revised GDP rate for Q1 due out on Friday and a possible slowdown also could weigh on the EUR as market worries for the economic outlook of the Euro Zone as a whole could intensify.

On a monetary level, ECB’s interest rate decision is expected to dominate EUR fundamentals next week. The bank is widely expected to cut rates by 25 basis points at the current stage, yet ECB actually doing so may not be enough to weaken the common currency as the market expects another rate cut until the end of the year. Should the bank in its forward guidance enhance such expectations, we may see the EUR slipping,  while a failure of the bank to imply that another rate cut is in the pipeline, contradicting market expectations, could allow the EUR to gain some ground turning the rate cut into a hawkish one.

On a fundamental level, we still see the political turmoil within Europe, especially in regards to Ukraine and Palestine being rather disappointing for EUR traders. Possible negotiations for a ceasefire in Ukraine could prove to be beneficial for the common currency. Furthermore, we note that the frictions in the EU-US trade relationships tend to be weighing on the EUR and any signs of thawing of the tensions could support the single currency.

Analyst’s opinion (EUR)

 “In the coming week we expect the ECB interest rate decision to be the focal point of EUR traders and a dovish cut could weigh on the common currency. On a macro level, the release of the revised GDP and preliminary HICP rates could move the EUR”

AUD – Q1 GDP rates to be the focal point of Aussie traders

Macroeconomics are expected to lead Aussie traders in the coming week. The main financial release is to be Q1’s GDP rate next Wednesday. Should the rate accelerate we may see the Aussie getting some support as it would imply that despite the adversity in international trade the Australian economy was able to expand at a faster pace. We also note the release of April’s trade data next Thursday and a possible widening of Australia’s trade surplus in April could support AUD. Also April’s building approvals growth rate could affect AUD as a deeper contraction than March’s -8.8%mm could weigh on AUD. Also we note the release of China’s May PMI figures and any improvement of the indicators’ readings could also support AUD as increased economic activity especially for China’s manufacturing sector could imply more exports of Australian raw materials to China.

On a monetary level, the tick down of the CPI rates for April, could allow for RBA to continue easing its monetary policy. It should be noted that the market seems to expect another three rate cuts by RBA until the end of the year, with the market’s dovish expectations possibly weighing somewhat on the Aussie.

On a fundamental level, the Aussie is considered a riskier asset in the FX market thus any improvement of the market sentiment could provide support, while any risk averse stance of the market could weigh. We highlight the trade wars as the main fundamental issue of the Aussie at the current stage and any intensification of tensions could weigh on AUD. 

Analyst’s opinion (AUD).  

 “We highlight the release of Australia’s GDP rate for Q1 as possibly the main event of the week for Aussie traders while market sentiment could alter the currency’s direction depending on the mood of the market”

CAD – BoC is expected to remain on hold on Wednesday

On a monetary level, BoC is expected to be the main event for Loonie traders in the coming week. The bank is expected to remain on hold at 2.75% and if actually so market attention is expected to be shifted towards the bank’s forward guidance. It should be note that the market currently expects the bank to proceed with another two rate cuts until the end of the year, hence could be characterised as dovishly oriented. Should the bank’s forward guidance point towards more easing of its monetary policy, thus indirectly enhancing the markets’ expectations the Loonie may lose some ground. On the flip side should the bank imply a slower pace of rate cuts or possibly a wait and see position, it may force the market to reposition its expectations and thus provide some support for the Loonie.

On a fundamental level, the Loonie is considered to have a positive correlation with oil prices, given Canada’s status as one of the main oil producing economies, thus should we see oil prices getting some support we may see the CAD rising as well and vice versa. Overall a positive market sentiment could support the CAD in the coming week, while a possibly more cautious market sentiment could weigh.

Ona a macro level we make a start by noting that Canada’s GDP rate is still to be released as these lines are written and could shake the Loonie. In the coming week we consider the release of Canada’s May employment data, next Friday, as the key financial release of the week and should the data align pointing a tighter Canadian labour market, we may see the CAD getting some support while an even looser Canadian employment market may weigh on the Loonie as it may enhance also the markets’ dovish expectations for BoC’s intentions.   

Analyst’s opinion (CAD)

“We expect BoC’s interest rate decision to be the main event of the week for the Loonie in the coming week yet should May’s employment data diverge significantly from market expectations they may overshadow BoC’s interest rate decision.”    

General comment

Overall we expect the USD to intensify its dominance over the FX market, yet high impact releases and monetary events could allow other currencies to create their own independent course, creating thus a nice trading mix. US stockmarkets despite some slight bullish tendencies seem to remain uncertain for the direction of their next leg, while gold’s price seems to confirm its negative correlation with the USD in its retreat since Monday.