FX Week Ahead – Fed And BoJ To Set The Tone

It will be a busy seven days in the coming week as the Fed and the Bank of Japan hold their respective monetary policy meetings. The US and Japan will also dominate the economic calendar with some key indicators expected next week, while UK GDP, Eurozone flash inflation and the RBNZ’s policy meeting will also be watched.

Eurozone inflation in focus post ECB

German Ifo data will start the week on Monday, and after this week’s disappointing Markit PMI surveys, the German business surveys are not expected to show much improvement for the month of April either. The Ifo business climate is forecast to stay unchanged at 107 in April, with a slight deterioration seen in current conditions, but future expectations seen improving marginally.

More surveys will follow on Thursday with the euro-wide Economic Sentiment index. But the main focus for the euro will be Friday’s preliminary CPI estimates. Annual inflation across the Eurozone is forecast to remain at 0% in April, and this shouldn’t surprise the ECB, which expects inflation to flirt with negative territory in the coming months before trending up later in the year. Also due on Friday is the March unemployment rate for the Eurozone.

FOMC will hold rates, but dissenting votes may offer clues

It will be a big week for the United States, as apart from the Fed’s policy meeting, some major data releases will also be important for the dollar’s moves. Housing data will start the week with new home sales on Monday, following by pending home sales on Wednesday.

On Tuesday, the March durable goods orders are out and are expected to rise by 1.7% month-on-month, following a 3% drop the prior month. Also out the same day is the consumer confidence index by the Conference Board. The index is expected to show a slight deterioration in April to 95.9 from 96.2 in March, which would not bode too well for consumer spending in the first month of the second quarter.

The FOMC will start its April policy meeting on Tuesday and announce its decision on Wednesday. The Fed is widely expected to keep its Fed funds rate unchanged at between 0.25-0.50% for the third straight meeting. However, with some policymakers becoming more concerned about the pick-up in inflation than others, it wouldn’t be a surprise if more committee members vote for a rate rise in April than the one dissent seen in March. The number of dissents may therefore provide a vital clue to the likelihood of a June rate hike.

Focus on the dollar will likely continue post the FOMC meeting, as Thursday will see the release of the advance GDP estimates for the first quarter. US economic growth is expected to have slowed from an annualized quarterly rate of 1.4% in the final quarter of 2015 to just 0.8% in the first three months of 2016. A weaker-than-expected number could trigger a dollar sell-off, particularly if there is a surprise negative reading.

Finally, Friday will see the release of the personal income and personal consumption expenditure figures for March, along with the latest PCE price index. Both personal income and spending are expected to accelerate slightly in March from the previous month. But the Fed’s favourite inflation gauge, the core PCE price index, is forecast to ease from 1.7% to 1.5% year-on-year in March. This would justify the Fed’s recent cautious tone and ease the pressure for immediate action.

Bank of Japan may surprise in busy week for Japan data

The Bank of Japan has been in the news quite frequently lately as the debate over the effectiveness of negative rates rambles on and the yen’s newfound strength raises eyebrows with policymakers. But the Bank is unlikely to escape the limelight as it meets next week for its scheduled policy meeting. Reports in the media today that the BoJ is considering applying negative rates on its lending facilities to encourage the country’s banks to lend more money have fuelled speculation that it will announce fresh measures next Thursday. The Bank may even cut its main policy rate further into negative territory and make changes to its QQE program.

Thursday looks set to prove an action-packed day for the yen, as prior to the BoJ’s announcement, key data will be released for household spending, inflation, unemployment, retail sales and industrial production. Household spending is expected to decline slightly by 0.3% month-on-month in March after a surprise jump the prior month. But industrial production is forecast to increase by 2.9% month-on-month, following a big drop in February. Inflation meanwhile is expected to weaken, with the headline rate easing to 0% and the core rate dipping into negative territory at -0.2% for the first time since October 2015.

RBNZ to stand pat for now

Another central bank to meet next week is the Reserve Bank of New Zealand. The RBNZ has cut rates five times in the past year as the collapse in commodity prices has hit the country’s exports and the inflation outlook has worsened. However, with the economy managing to maintain a healthy growth rate and signs of dairy prices stabilizing in April, the RBNZ is expected to hold rates in Thursday’s meeting. Also to watch for the New Zealand dollar will be Wednesday’s trade figures.

Also to watch: UK GDP and Australian inflation

After China, the UK will be the second major country to publish its GDP figures for the first quarter on Wednesday. The British economy is expected to have expanded by 0.4% quarter-on-quarter in the first three months of 2016, according to preliminary estimates. This would represent a slowdown from the 0.6% rate seen in the prior quarter. A weaker reading is possible given the disappointing jobs and retail sales numbers this week.

Also worth watching next week will be the quarterly inflation figures out of Australia. Annual inflation in Australia is expected to edge up to 1.8% in the first quarter of the year from 1.7% previously. This would take it closer to the Reserve Bank of Australia’s 2-3% target band and may deter the RBA from considering further rate cuts soon.