Forex Market Outlook Central Bank Meetings On Tap

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Forex Market Outlook: Central Bank Meetings On Tap

The dollar has begun to strengthen once again but traders should be cautious. While the dollar is indicated higher the longer-term forecast for most pairs is range-bound. While the U.S. economy is stabilizing, reducing expectations for FOMC policy changes, so to is the rest of the world. No single economy stands out as a winner right now, the trade war has taken a toll on them all, but the U.S. is clearly in the strongest position. With the Phase One Deal in the bag, it is very likely the worlds economies will start to reaccelerate and that will cap gains in the dollar. Until then, this is what traders should expect this week.

The Bank of Japan is meeting this week, now, today, and will release their statement on Tuesday. The bank is not expected to change policy but may make statements supportive of the economy. The banks focus this week will likely be on the consumer. Consumer spending has taken a sharp downturn in the last months of 2020 following a sales-tax increase in October. The tax increase is expected to aid Japan’s government but not if sales slow significantly and remain subdued. The USD/JPY is in uptrend right now and moving higher. The pair bounced off of a strong support level at the start of the year and is indicated higher. Current resistance is at the 110.00 level, a move above that will likely take the pair up to 112.00.

The ECB Meets This Week

The ECB meets later this week and is also not expected to alter policy. While there have been some signs of economic stability within the region the data is still weak. What the bank is expected to do is double-down on its commitment to support the economy if needed. The EUR/USD is moving lower after confirming the top of a trading range at 112.00. Since then, the downtrend within the range has also confirmed with a fall from the short-term EMA. The pair is now expected to continue lower but there are support targets to worry about. the first is near 1.10750, a fall below there could go to 1.1050 and 1.1000 with quickness.

The BOE is meeting next week, concurrent with the FOMC, and is also not expected to alter policy. The BOE may come out with a positive statement about the economy, mostly due to the expected soft-Brexit, but there are still risks. The Brexit is expected to move forward at the end of the month but the drama isn’t over. The stage 2 round of negotiations will start on February 1st and shows every sign of being contentious. The GBP/USD has been trending sideways since hitting a one-year high in December. The pair is showing signs of support at the 1.300 level. This level is going to be key over the next two weeks, if it confirms as support traders can expect to see the recent high retested or surpassed. If support fails the GBP/USD could slide to 1.2800 or even 1.2600.

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Central Bank Meetings on Tap : RBA, BoC, ECB, and BoE All this Week

After last week’s late fireworks, global investors have been calling for more action by central banks to help ease financial tensions. This week should be a litmus test. On deck (in order): the Reserve Bank of Australia, the Bank of Canada, the European Central Bank, and the Bank of England. Federal Reserve Chairman Ben Bernanke is also due to speak on Thursday, which, after Friday’s disappointing Nonfarm Payrolls, should be particularly interesting in light of rising QE3 expectations.

06/05 Tuesday // 04:30 GMT: AUD Reserve Bank of Australia Rate Decision

The Reserve Bank of Australia will meet on Tuesday, and it is expected that they will cut their key interest rate by 50-basis points. According to the Credit Suisse Overnight Index Swaps, there is a 51.0 percent chance of a 50-bps cut, with a 100 percent chance of a 25-bps cut. A Bloomberg News survey suggests otherwise, however, with economists forecasting only 25-bps to be cut. Considering how beaten down the Australian Dollar has been these recent weeks, a 25-bps should lead to some short-covering and could lead to a firm rally. On the other hand, a 50-bps will lead to some downside, but not much. I favor a 25-bps cut. The key pairs to watch are AUDJPY and AUDUSD.

06/05 Tuesday // 13:00 GMT: CAD Bank of Canada Rate Decision

The Bank of Canada meets on Tuesday as well, and unlike the RBA, they are expected to hold rates. If anything, given recent rhetoric from BoC Governor Mark Carney, it is likely that the BoC employs a hawkish tone. With that said, it is unlikely that a rate hike is coming, with the OIS suggesting a 13.6 percent chance of a 25-bps rate hike (unchanged since May 21). Data has been supportive of higher rates in Canada, but it is unlikely that will come in the near-future as the globe faces an impending economic slowdown. If there are commentary about the housing bubble that is starting to form, they will be hawkish in nature and be largely supportive of a stronger Canadian Dollar. The key pairs to watch are USDCAD and CADJPY.

06/06 Wednesday // 11:45 GMT: EUR European Central Bank Rate Decision

The European Central Bank is widely expected to leave rates unchanged at 1.00 percent this week, despite increasing calls by industry officials and Euro-zone leaders to see the central bank cut rates. Ailing banks could use lower rates – this would ease some financial stress. I think that a 25-bps rate cut is necessary as well, but President Mario Draghi has been apprehensive about providing support to the region as long as governments continue to lollygag through the crisis. If no rate cut is made, then we’ll need to see how the Governing Council voted; if there is no indication that some members are leaning towards a looser monetary policy. Ultimately, I think that this should be a Euro-bullish event. If the ECB does not propose anything new and shows no indication that it will be willing to do so in the future, then it could be a very rough day for the Euro. I lean towards the latter. The key pair to watch is EURUSD.

06/07 Thursday // 11:00 GMT: GBP Bank of England Rate Decision

Although the Bank of England does not disclose its voter breakdown until the minutes are released two weeks later, this meeting still holds great interest. British data has been disappointing recently, and with fiscal policy hamstrung, any further economic assistance will need to come from the BoE. With that said, it still appears unlikely that the BoE will cut rates or even implement a new Asset Purchase Target (currently £325B). I do think it will come shortly, but that largely depends on what the Fed does – the BoE has been following the Fed’s cues recently. If there is no change in the key interest rate or APT, look for the British Pound to rally – it was absolutely destroyed in May, having lost approximately 1000-pips to the US Dollar. The key pairs to watch are GBPJPY and GBPUSD.

06/07 Friday // 14:00 GMT: USD Federal Reserve Chairman Ben Bernanke Testifies

After Friday’s exceptionally disappointing Nonfarm Payrolls report, it’s of little coincidence that calls for another round of quantitative easing have surged. We should be able to get a good gauge of this later this week, when Federal Reserve Chairman Ben Bernanke testifies in front of a Congressional committee on Thursday, to discuss the state of US economic affairs. I am going to be blunt: there is a zero percent chance that Chairman Bernanke announces QE3 at a Congressional testimony. It has never happened before and it is the inappropriate forum to do so. Accordingly, I would expect the market to sell the US Dollar for the coming days until the hearing, at which point I believe market participants will do an about face and begin buying US Dollars, quickly. The key pairs to watch are AUDUSD, EURUSD, and USDJPY. Also of interest are Crude Oil and Gold. If QE3 ON: higher AUDUSD, EURUSD, Crude Oil, Gold; and lower USDJPY. If QE3 OFF: lower AUDUSD, EURUSD, Crude Oil, Gold; and higher USDJPY.

Rate Hike Probabilities / Basis-Points Expectations

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

— Written by Christopher Vecchio, Currency Analyst

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