The week ahead will be dominated by central banks once again. This week will see the Bank of Canada’s monetary policy decision alongside the release of the Federal Reserve monetary policy meeting minutes.
The recent uptick in Canada’s GDP could potentially give rise to a hawkish message from the BoC. Meanwhile, investors look to see how the FOMC minutes will shape the expectations of the Fed going forward.
On the economic front, the UK will be releasing its GDP data alongside industrial and production figures for June. Recent data has been broadly weak especially on the GDP front. The sterling is, however, expected to shrug aside the economic data in lieu of the Brexit developments.
China’s consumer inflation and producer prices index data will also be coming out this week. The data gains attention as investors weigh the prospects of the US-led tariffs and its impact on both consumer and producer prices. China’s inflation data will lay the groundwork in the run-up to next week’s other important data that include quarterly GDP figures.
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Data from the eurozone takes a backseat, for the most part, this week. Industrial production figures are due as well as business and consumer surveys. We also expect the Sentix investor confidence report this week alongside Germany’s trade balance figures.
Here’s a quick recap of what’s to come in the currency markets this week.
US Inflation Data and Fed Minutes
Following a weak set of data from the Institute of Supply Management (ISM), and a subdued payrolls report, the expectations rise for a Fed rate cut. This was evident from the market rally last week which saw the US equity markets rising to fresh all-time highs.
This week, investors will get a glimpse into the Fed’s thinking on policy. The minutes will cover the June FOMC meeting where the Fed left interest rates unchanged. However, the central bank did announce that it would cut rates if the economy deteriorated.
Besides the FOMC meeting minutes, the week ahead will see the monthly consumer and producer prices index reports coming out. Inflation could ease back after weaker oil prices. The data could also further cement expectations of a rate cut.
US producer prices index is forecast to rise by 0.1% on the month in June. This marks the same pace of increase as the previous month. On a year over year basis, PPI is forecast to rise to 2.0%, up from 1.8% previously. Core PPI is forecast to remain steady, rising at a pace of 2.3%.
Will BoC Signal Hawkish Forward Guidance?
The BoC is unlikely to make any changes to its monetary policy. Therefore, interest rates will remain at 1.75%.
However, investors expect the BoC to shift its forward guidance from dovish to hawkish. This comes on the back of the recent economic data which has been somewhat positive. The latest monthly GDP reports saw the Canadian economy slowly gaining momentum.
Canada’s inflation, on the other hand, remains anchored to the BoC’s inflation target rate of 2.0%. The economic data will no doubt put the BoC on a hawkish path. This remains in contrast to many other central banks including the Fed who have turned dovish.
With most of the central banks signaling a dovish path, and some indicating a rate cut on the horizon, the BoC remains the sole central bank among the major economies that remains hawkish.
But we expect the central bank to use plenty of caution as it steers the global economic headwinds. Trade wars remain the major theme of uncertainty for monetary policy.