Week Ahead in FX: Federal Reserve Leads Central Bank Charge

The Federal Reserve takes center stage this week with June’s Federal Open Market Committee (FOMC) meeting. There is no rate hike expected at this meeting but the press conference following the FOMC statement will have an impact on the forex market.

Central banks retake their key role in guiding the market this week with the release of minutes from the Reserve Bank of Australia, the Bank of England, and benchmark rate statements from the U.S. central bank, the Swiss National Bank, and the Bank of Japan.

The U.S. economy improved overall in the last week. In particular it managed to break a negative trend in retail sales which signals the return of American consumers. At the beginning of the month, employment once again proved to be the strongest pillar of the U.S. economy, but questions remain if the recovery is sustainable and if it could withstand the effects of a higher interest rate. The Fed’s insistence on data dependency has added volatility to every indicator as investors seek confirmation that the it will act sooner rather than later.

Of note, the International Monetary Fund and the World Bank among other economic organizations have warned the Fed that raising rates too soon could be harmful, not only to the U.S. but to other economies around the globe.

Draghi to Focus on QE and Bond Buying in Brussels

European Central Bank (ECB) President Mario Draghi will testify before the European Parliament’s Economic and Monetary Affair Committee in Brussels on June 15. The two main items on the agenda are: quantitative easing (QE) and sovereign bond purchases and risk sharing. Following his previous meeting with the Committee, the ECB launched its QE program. Although it’s too early to tell if the easing policy has produced the desired results, some preliminary results will be shared to add to what the market already knows from the central bank’s statements. The second item on the agenda, and the more pressing, is Greece. If and how it figures as a continuing member of the eurozone has yet to be determined, including how much risk should be shared across the eurozone, as well as the consequences of another bailing the cash-strapped country out again.

RBA Minutes to Focus on Stimulus and Housing Concern

The Reserve Bank of Australia held rates on June 1, 2015, at the historic low of 2%. The minutes from that policy meeting will be released on Monday. Governor Glenn Stevens has already said the Australian central bank policy will remain accommodative. Australia’s economy is navigating rough seas with the slowdown in China impacting commodity exports. Low rates are needed to stimulate growth, but have also inflated house prices which remain a concern, especially in the urban areas such as Sydney. It’s unlikely anything in the minutes will come as a surprise, but they will add color to Stevens’s recent remarks on the state of economic affairs Down Under.

BOE to Show Unanimous Rate Hold, Eyes on Inflation

On June 17 the Bank of England (BoE) will publish the minutes from its Monetary Policy Committee (MPC) meeting earlier this month. The vote is likely to remain at zero against versus nine in favor to hold the Old Lady’s benchmark interest rate at 0.5%. Two of the nine MPC members in the last go-around hinted the decision was finely balanced between holding and raising rates, but since last month, there hasn’t been enough evidence inspire a vote against holding rates. That being said, earlier today BoE policymaker Ian McCafferty said that some of the headwinds holding back the economy were starting to fade and could warrant a rate increase. This marks the first time a member of the MPC has discussed a rate hike since the fall of 2014 where pessimism toward the economy started to show from the central bank. The inflation data on June 16 will be more telling on how close the U.K. is to an actual rate hike as it must avoid the deflation which Governor Mark Carney has insisted is in a transitory state. Higher food and oil prices will validate Carney’s statement on the temporary nature of deflation, but in a global low-rate environment, it will be harder for the U.K. to surprise the market with an accelerated rate of growth to justify a rate hike anytime soon.

June FOMC: The Rate Hike That Wasn’t

The market had at one time priced in the eventuality of a U.S. rate hike in June. The Federal Open Market Committee (FOMC) will meet with little to no expectation of a rate hike that is now forecast to occur in September or October. The September FOMC meeting has a bit of an edge, because like the June meeting, it has a press conference scheduled after the release of the bank’s monetary policy statement. October might work better in terms of timing, but it is unclear if the Federal Reserve would want to announce the highly expected interest rate hike with no chance for a Q&A.

The World Bank joined the International Monetary Fund in warning the Fed about hiking rates too soon. The World Bank’s bi-annual Global Economic Prospects report highlights the risks to the global economy, and in particular emerging markets if higher rates arrive before the U.S. economy is ready for them. So far the data out of the U.S. have been mixed at the best of times. Employment remains the strongest indicator, with positive surprises like the jump in U.S. retail sales in May.

Investors and market watchers will be awaiting the statement from the FOMC to seek clues about what the Fed has in store down the line, as the June meeting has already been discounted as the chosen one for the what despite the warnings will be an imminent arrival of higher rates.

Little Expected of Swiss National Bank, Bank of Japan

Two of the maverick central banks that have jolted the markets with unexpected policy decisions are expected to hold their respective rates and keep their stimulus programs unchanged.

The Swiss National Bank is expected to keep its rate at -0.75% in an effort to keep the Swiss franc devalued versus the USD. The Bank of Japan, meanwhile, has said that it has seen some positive effects of its ¥80 trillion-a-year stimulus program, but the effect on inflation has been disappointing as it still lags behind the 2% mark promised by Prime Minister Shinzo Abe two years ago.

Monday, June 15
9:00 a.m. — EUR ECB President Draghi speaks
9:30 p.m. — AUD RBA monetary policy meeting minutes

Wednesday, June 17
4:30 a.m. — GBP MPC official bank rate votes
2:00 p.m. — USD FOMC economic projections

Thursday, June 18
3:30 a.m. — CHF SNB monetary policy assessment
Tentative — JPY BoJ monetary policy statement

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