The Forex Week Ahead
The Forex Week Ahead: Fed-speak may dominate domestic drivers of US market action next week. The market focus these days is on waning inflation and the debate over how transitory the recent weakening may prove to be. In that context, the week’s data focus upon housing probably won’t matter one iota. What markets still need to hear from the Fed is a lot more colour on why they are so prepared to dismiss the recent softening in core inflation. While she did acknowledge “weakness in a number of categories”, Chair Yellen cited one-offs like mobile phone service package pricing that has been falling for years but plummeting over the past year, as well as drug prices as specific examples of temporary considerations. existing home sales for May (Wednesday) and new home sales for the same month (Friday) are about the only sources of data risk modestly complemented by Markit’s purchasing managers’ indices for June on Friday. Markit’s measures have a checkered track record when it comes to mapping onto the more widely followed ISM readings and usually don’t get the same play. New home sales should ratchet higher following a large 11% m/m drop in April, and resales are likely to be little changed with slight upside risk. Also note that the week ends with Moody’s US sovereign debt rating on Friday.
Eurozone purchasing managers’ indices will be updated with June readings next Friday. They’ve been expected to soften for some time now but continue to rise to multi-year highs. It’s the combined strength in manufacturing and the larger services sector that makes the pick-up particularly impressive. Having said that, little of this rise in PMIs has translated into material GDP upsides thus far. Q1 GDP climbed by 0.6% QoQ which was only a modest acceleration from 0.5% the quarter before and 0.4% before that.
After Bank of England Governor Mark Carney cancelled his annual Mansion House speech this past Thursday, we’ll be watching for when it may be rescheduled with the only guidance given thus far being that this will be done “in due course.” Carney’s speech was cancelled to honour the Grenfell Tower victims. It also perhaps gives him more time to follow up the tighter-than-expected vote that had three members of the Monetary Policy Committee voting to raise rates now in a narrow 5–3 outcome. Carney will be watched for his guidance on the extent to which the BoE thinks inflation will rise further and the extent to which the BoE is willing to look through it as a transitory development in the face of risks facing the consumer and Brexit negotiations.
The Japanese yen fell to a two-week low after the Bank of Japan left its ultra-accommodative monetary policies in place and signalled it was in no rush to follow the Fed down the path of monetary policy normalisation. Market speculation that the BOJ could discuss a strategy to exit its massive stimulus packages was wrong footed by policymakers’ commitment to keeping stimulus in place for the foreseeable future. Japanese trade data will headline the otherwise quiet economic calendar this week, but the yen’s direction may remain heavily driven by moves in broader global markets or by developments the U.S.