Week ahead: Fed to prepare markets for July rate cut
Fawad Razaqzada June 14, 2019 6:17 PM
Undoubtedly, next week’s main event is likely to be the FOMC rate decision on Wednesday. While rate cut expectations have risen sharply of late, no one is seriously expecting the Fed to loosen its belt at this meeting, despite the weakness in core consumer prices in May.
The upcoming week features interest rate decisions from three major central banks, namely the Federal Reserve, Bank of Japan and Bank of England, as well as top tier data from around the world, including Eurozone PMIs, UK CPI, and New Zealand GDP, where data has taken a sharp downturn of late. Traders will also be monitoring the latest developments regarding the US-China trade spat, US-Iran war of words and the Tory party leadership contest. There will be something for everyone.
Undoubtedly, next week’s main event is likely to be the FOMC rate decision on Wednesday. While rate cut expectations have risen sharply of late, no one is seriously expecting the Fed to loosen its belt at this meeting, despite the weakness in core consumer prices in May. However, what we and most other analysts expect is that the Fed will probably use this meeting to prepare the markets for a potential trim in the July and possibly September and/or December meetings. Look out for the updated dot plots and economic projections.
Here is a full highlight of the upcoming week:
There is nothing significant on Monday with the exception of Empire State Manufacturing Index and a couple of other not-so-important US macro pointers.
RBA’s meeting minutes, German ZEW survey, Canadian manufacture sales and some housing market data from the US (building permits and housing starts) will be released on Tuesday. These macro pointers are only likely to impact local currencies, albeit mildly. But they probably won’t have much of an implication on the wider markets.
CPI data from UK and Canada will provide FX traders some distraction ahead of the day’s main event: FOMC.
Although the Fed is expected to hold policy unchanged at this meeting, many analysts believe the central bank will nonetheless prepare the markets for potential rate cuts later on in the year, with some suggesting July, September and December as likely dates when rates are expected to be cut. However with expectations being so low now, the FOMC could surprise by adjusting the dot plots on interest rates outlook only slightly lower: instead of three, it might just signal two cuts in 2019. That could give rise to a potential short term squeeze on the dollar shorts against currencies which have outperformed of late (such as yen and gold).
Thursday will kick off with the release of New Zealand GDP (actually it will still be Wednesday for UK and US traders), followed by the Bank of Japan rate decision slightly later. The BoJ has almost run out of ammunition, so it’s hands will be tied. We don’t expect any new policy announcements.
Thursday will also see the release of UK retail sales and a rate decision from the Bank of England. Some BoE policy makers have recently suggested that interest rates should be higher than where they are at the moment, because UK data has been surprisingly resilient. But with other major banks turning dovish and some already cutting interest rates amid concerns over a global slowdown, and not to mention ongoing political and Brexit uncertainties in the UK, the BoE’s Governor Mark Carney may well provide a more dovish assessment of domestic interest rates than the markets expect.
The first half of Friday’s session will all be about Eurozone PMIs, given concerns over global growth. Should these PMIs disappoint expectations then Eurozone yields and the single currency could fall even more. From North America, the key data on Friday will be retail sales.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.