Week Ahead: BoE and RBA, plus yen in focus

It’s a quieter week on the data front, but that’s hardly surprising after the recent few blockbuster days. We do get to hear from two major central banks, with the RBA and Bank of England both set to stand pat on rates. However, markets will be laser-focused on any clues for their respective rate paths in the coming months. Central bank policy divergence could come into play here.

Last week’s FOMC meeting saw officials acknowledge the lack of progress on inflation, although Chair Powell reiterated that interest rates are likely to be cut this year. The first rate move was brought forward after the NFP data and is fully priced in for the September FOMC meeting. US data takes a breather this week in terms of top tier releases.

Friday’s jobs data was the first time in a long time that all components came in weaker than expected. The warm winter had boosted employment growth, but the labour market could now finally be rebalancing, returning to trend and in line with softer survey data. The dollar broke down late last week out of its recent range around 106, though buyers did step in after the immediate NFP sell-off. The 50-day SMA at 104.54 acted as support.

The BoE publishes its new quarterly forecasts on Thursday, with markets wondering if the MPC will tweak its forward guidance. A dovish hold could be on the cards if rate setters remove the “extended period” phrase regarding rates staying in restrictive territory. Inflation forecasts will also be eagerly watched as big reductions could signal the bank is lining up a June rate cut. Markets are currently pricing in a 50–50 chance of that happening. A full 25bps reduction is predicted by the next meeting on August 1, followed by a path of gradual easing. Cable spiked higher above 1.26 on Friday but retraced nearly all its gains. The 200-day SMA at 1.2550 has recently capped the upside.

The RBA will have to address hotter than expected inflation data, after it watered down its tightening bias in March. Markets narrowed the odds of the bank having to lift rates again, with most of a 25bps hike priced in by the September meeting. Underlying inflationary pressures are running at a pace incompatible with the RBA’s 2-3% CPI target range. That means we could get more of a “hawkish hold”. That said, some of those rate cut bets were pared after the fall in retail sales data. The aussie has struggled at a long-term Fib retracement level (38.2%) of the Q4 rally at 0.6641.

Finally, once again markets will be on high alert for volatility in USD/JPY. After the spike above 160 early last Monday, intervention was deemed likely on at least two occasions through the week. Data suggests the Japanese authorities bought close to Y9 trillion to support the currency. The low in the major came after NFP at 151.85. The 152 zone is major support from the prior intervention in 2022 and resistance in 2023. The issue is that unilateral intervention rarely succeeds in the long term.

In Brief: major data releases of the week

Tuesday, 07 May 2024

– RBA Meeting: Consensus expects no change, leaving rates at 4.35%. Disinflation has stalled and core inflation has actually started to edge higher, with further upside risks in the coming months. But the labour market has slowed, along with the economy.

Thursday, 9 May 2024

–  Bank of England Meeting: Rates will be left at 5.25%. The previous vote was 8-1 with two hawks moving into the hold camp. Recent MPC comments highlight some differences of opinion. An updated quarterly MPR and fresh inflation projections are published. Focus will be on the latter and the size of the downgrades.

Friday, 10 May 2024,

– UK GDP: Consensus expects growth to rebound to 0.4% q/q from the prior -0.3%, with the March figure forecast to continue the expansion seen since the start of the year. PMIs also point to improved growth momentum.

– Canada Jobs: Expectations are for 20k job gains in April. The unemployment rate is predicted to tick up to 6.2%. Economists say that continued rapid population growth could drive greater expansion in the labour force than employment.