Week Ahead in FX: Central Banks, Retail Sales, Inflation to Dictate Direction

Central bank minutes, retail sales, inflation reports and manufacturing productivity will be the four major themes this week in the forex market.

The Bank of Japan will be in the spotlight on Friday and whatever it does will ultimately define the week. Inaction will lead to further speculation as to when Japanese officials will act given its propensity to surprise the market on occasion.

Elsewhere, economic growth has slowed in the United Kingdom and the United States. Retail sales in the U.S. have already shown American consumers are not spending. The U.K. will release retail sales data this week to a modest forecast, but the effects of the pre-election period are not known.

Inflation has been low in the developed markets and there is little hope this would have changed. This makes the jobs of the Bank of England, the Federal Reserve, and other major central banks harder. Manufacturing productivity has been weak across the board as there is lower demand as consumption has cooled. The world’s second-largest economy, China, is struggling to boost its economy through various measures, but it’s likely it will still fall short of its desired 7% growth target for the year.

Europe impressed with its first quarter gross domestic product growth measure for France and Italy. Manufacturing in Europe has been boosted by a weaker EUR and that could lead to positive purchasing managers’ indexes (PMI).

Monday, May 18
9:30 p.m. AUD – RBA monetary policy meeting minutes
Tuesday, May 19
4:30 a.m. GBP – consumer-price index, year-over-year
5:00 a.m. EUR — German ZEW economic sentiment
11:45 a.m. CAD – BoC governor speaks
7:50 p.m. JPY – Preliminary GDP, quarter-over-quarter
Wednesday, May 20
4:30 a.m. GBP – Monetary Policy Committee official bank rate vote
8:30 a.m. CAD — Wholesale sales, month-over-month
2:00 p.m. USD – Federal Open Market Committee meeting minutes
9:45 p.m. CNY — HSBC flash manufacturing PMI
Thursday, May 21
3:00 a.m. EUR — French flash manufacturing PMI
3:30 a.m. EUR — German flash manufacturing PMI
4:30 a.m. GBP — Retail sales, month-over-month
8:30 a.m. USD — Unemployment claims
10:00 a.m. USD — Philly Fed manufacturing index
Tentative JPY – BoJ monetary policy statement
Friday, May 22
Tentative JPY — BoJ Press Conference
4:00 a.m. EUR — German Ifo business climate data
8:30 a.m. CAD — Core consumer-price index, month-over-month
8:30 a.m. CAD — Core retail sales, month-over-month
8:30 a.m. USD — consumer-price index, month-over-month
8:30 a.m. USD — Core consumer-price index, month-over-month

Central Bank Watch: Bank of Japan Could Stage Surprise

Earlier this month, the market witnessed an expected rate cut by the Reserve Bank of Australia (RBA), the return of a vocal Bank of England (BoE) after the U.K. general elections, and a neutral Federal Reserve that keeps touting data dependency.

The minutes from those three bank meetings will be released the week of May 18. No surprises are expected from policy members’ comments at those summits, but it will be interesting to get more insight into what economic indicators they did mention specifically, and the risks posed by various international events.

Notably, the Bank of Japan (BoJ) has been quiet of late. The lofty goals entrenched in Prime Minister Shinzo Abe’s economic reform plan, aka Abenomics, seem well out of reach with the Japanese economy failing to achieve sustained growth. This leaves investors in a conundrum. Many are unsure if the BoJ will follow the path of recent history by remaining patient and doing nil, or giving the market a jolt by taking unexpected action to lower the yen. After being the most proactive central bank in 2013, the BoJ spent much of 2014 on the sidelines.

The Aussie’s Rise a Concern Down Under

The RBA cut its benchmark rate to a record low of 2% on May 5. The market had priced in such a move after policymakers held the rate steady in April. The rise of the AUD continues to have a negative impact on Australia’s economy, and RBA Governor Glenn Stevens was forced to act. Commodity currencies are struggling after the USD lost the impressive pace it held last year. Depending on what was said, the minutes from the RBA’s meeting can help the currency to trade lower to boost the competitiveness of the nation’s exports.

Little Expected From British, American Central Banks

The BoE has emerged from its purdah period – a means to prevent public speculation about the bank’s Monetary Policy Committee’s (MPC) decisions – to avoid affecting the outcome of the U.K.’s general election that resulted in a Conservative majority.

Great Britain’s central bank has made up for lost time and have been grabbing headlines this week. After holding rates at a record low, the BoE proceeded to cut the growth forecast for the U.K. economy. The forecast now is for a 2.5% growth versus a 2.9% prediction earlier in the year. The minutes from the MPC meeting will show a unanimous decision to hold rates, as various members have stated that conditions have worsened, and are far from the levels of optimism shown before October 2014.

Across the pond, the greenback is in need of support and the most likely source this week will be the Federal Open Market Committee (FOMC) meeting minutes. Last month, the buck found itself in a similar scenario. Disappointing employment and retail sales numbers were met with a neutral-to-hawkish FOMC that canceled some of the losses for the dollar.

Statements from Fed members have not been as hawkish lately, and in fact, the latest comments from some members have added more uncertainty to when the first interest rate hike will occur. San Francisco Fed President John Williams mentioned that the central bank faces no pressure to act, and that the rate hike could happen at any meeting. This of course includes the June meeting that was once favored to be the moment when a rate hike announcement would be made. That’s no longer the case and now the market is pricing the likelihood of a hike later in the year.

Central Banks events to watch this week:

Monday May 18
9:30pm AUD Monetary Policy Meeting Minutes

Wed May 20
4:30am GBP MPC Official Bank Rate Votes
2:00pm USD FOMC Meeting Minutes
Thursday May 21
JPY Monetary Policy Statement

Friday May 22
JPY BOJ Press Conference

*All times EDT

Manufacturing PMI Gives France Another Chance to Impress

A Chinese economy that is slowing down along with the American economy’s recent stumbles have prompted investors to focus on Europe and France in particular.

Gross domestic product (GDP) figures released last week in the eurozone surprised to the upside in aggregate. The biggest surprise was not that Germany missed its forecast underperforming at 0.3% versus an expected 0.5%, but rather that France and Italy beat expectations.

France posted 0.6% growth, the highest rate of growth in the Fifth Republic since 2011. Inarguably, Germany will continue to be the engine of growth for the European Union and its GDP miss can be chalked up to current macroeconomic conditions. But the fact that France and Italy are showing positive signs of late has triggered hope that the end of those countries’ stagnation may finally be at hand. It leads one to assume the effects of the European Central Bank’s quantitative easing program launched last March is producing the desired result.

Chinese Economic Performance Keeps Traders on Edge

Preliminary manufacturing purchasing manager’s indices (PMIs) will be released for China, France, and Germany beginning on May 20 at 9:45 p.m. EDT.

China has not posted a reading above 50 in the last two months – a PMI reading over 50 points is considered expansion territory. In other words, and much to the world’s chagrin, China’s manufacturing sector has been contracting for two consecutive months. The latest PMI came in at 49.2, which is close to expansion, but the Chinese industrial complex has not been able to keep it above the 50 benchmark for long. The Chinese government has been proactive both in the use of monetary policy and verbal intervention in warning the market about a potential failure for the country to reach its 7% growth target this year.

European PMI releases will provide another chance for France to pleasantly surprise the market. French manufacturing has struggled to impress in the first quarter of the year, but a cheaper currency as a result of the ECB’s aggressive monetary policy could start to have a positive impact on purchasing sentiment this month. The survey takes into account the opinions and insights of 400 purchasing managers, and any hints of optimism could push the manufacturing PMI reading beyond last month’s 48-point print.

Expect the EUR/USD pair to react to the European flash PMI releases in a week where productivity, inflation, and central bank minutes take center stage.

Manufacturing data events this week:

Wednesday May 20
9:45pm CNY HSBC Flash Manufacturing PMI
Thursday May 21
3:00am EUR French Flash Manufacturing PMI
3:30am EUR German Flash Manufacturing PMI
10:00am USD Philly Fed Manufacturing Index

UK Retail Sales May Suffer Post-Election Hangover

U.K. retail sales data fell unexpectedly in March (-0.5%), further highlighting the economic slowdown on the British Isles in the first quarter of the year.

Prior to the U.K. federal election, it was one of the weak spots for the incumbent Conservative Party. Confidence in the economy seems to have won out to immediate concerns as the Conservatives under Prime Minister David Cameron retained power, winning convincingly with a majority of seats in parliament. Forecasts for U.K. retail sales point to a 0.3% growth in retail data. A final print in-line or beating expectations could boost the GBP and give a further boost of confidence in the economy. A below expectations figure would continue to validate the slowdown trend as few factors have changed, and it is uncertain what effect the election had on consumer behavior.

Canucks Start Spending

Canadian retail sales enjoyed a surge last month, beating expectations for its ex-auto reading at 2.0%. Expectations were a modest 0.7%, the same figure that is forecast for this month. Previously, Canadian sales figures posted two negative months in a row. The biggest winners were general merchandise and sporting goods sales. The warmer weather played a big part in the revival of the retail sector in Canada, which will probably post a reading in-line with forecasts as the spring-like weather continues.

Retail sales events to watch this week:

Thursday, May 21
4:30 a.m. GBP — Retail sales, month-over-month
Friday, May 22
8:30 a.m. CAD — Core retail sales, month-over-month

*All times EDT

UK, US, and Canada to Report Low Inflation

Inflation numbers have been subdued around the world due to lower energy prices and the effect of major central bank economic easing policies. The United Kingdom, Canada, and the United States will release inflation data next week that is expected to be in line with low inflation forecasts.

The Group of 20 country aggregate inflation is starting to show signs that low inflation has bottomed out. However, this is not the case in developed economies where low interest rates and stimulus programs are still common.

Low inflation complicates a central bank’s job, making it harder to justify a rate hike. The American employment component was the biggest supporter of an interest rate hike sooner rather than later, but even that indicator started to soften as growth skews more toward part-time and lower wage jobs. The Federal Reserve has mentioned in various official statements and member commentaries that low inflation is not a deterrent for a rate hike, and that the bank will hike when data shows that the U.S. economy can sustain higher rates.

A report in Bloomberg on Friday on the Bank of Canada (BoC) suggests it is considering the possibility of raising its inflation target as a signaling device to avoid raising rates which could have a sudden impact in the housing market. The BoC has shown concern about housing prices that have been driven upward by low interest rates. A hike could put a lot of Canadians in trouble, as their debt levels are not sustainable, and could trigger insolvency with a 50 basis points hike.

The Bank of England (BoE), meanwhile, released its quarterly inflation report this week and it came with a cut in growth forecast for the United Kingdom. The current rate of inflation in the U.K. stands at 0%, far below the target set by the central bank. BoE Governor Mark Carney has stated that this is transitory and after the effects of lower energy and food prices, inflation should go back to normal. Like the Fed, the Old Lady of Threadneedle Street is not heavily concerned about deflation and will not proactively act to push it higher. Instead, it will manage its expected rise as the central bank is focused on raising interest rates though the slowdown in U.K. growth could precipitate a rate hike being delayed until next year.

Inflation events to watch this week:

Tuesday, May 19
4:30 a.m. GBP – consumer-price index, year-over-year

Friday, May 22
8:30 a.m. CAD — Core consumer-price index, month-over-month
8:30 a.m. USD — consumer-price index, month-over-month

For more macro economic events impacting the forex market visit the MarketPulse Economic Calendar

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza