Thu, Jan 27, 2022 @ 13:57 GMT
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Week Ahead – All Eyes on NFP after Dovish FOMC; RBA and BoE to Hold Rates

Key data out of the United States next week may provide the struggling dollar some boost after the Fed struck a less hawkish tone at the July policy meeting. The latest non-farm payrolls numbers will be the most keenly watched indicators of the week but central bank meetings in Australia and the UK will also be in focus. In other data, the preliminary flash GDP estimates for the Eurozone will be eyed too.

RBA meets as aussie soars above $0.80

The Reserve Bank of Australia’s Governor, Philip Lowe, has made it clear he isn’t too happy about the recent upsurge of the Australian dollar, which hit a more than two-year high of $0.8065 this week. He has also said he is "very comfortable" with the current low interest rate policy. This hasn’t stopped traders however from increasing their long positions on the aussie as risk sentiment rebounds and commodities rally. The RBA is expected to hold rates at 1.5% on Tuesday but may decide to use stronger language to warn against further appreciation of the currency. It’s latest quarterly monetary policy statement, which assesses economic conditions and the outlook, will follow on Friday.

In terms of data, there are several major data releases for June which should also be watched. These are building approvals on Wednesday, trade figures on Thursday and retail sales on Friday.

Across the pond in New Zealand, second quarter jobs data on Wednesday may go some way in making up for the softer-than-expected inflation figures for the same period, giving the kiwi an extra helping hand.

Looking at other Asian markets, Japan will publish preliminary industrial output numbers for June on Monday, while over in China, PMI data will be in focus. The official manufacturing and non-manufacturing PMIs are due on Monday, followed by the Caixin manufacturing and services PMIs on Tuesday and Thursday respectively.

Eurozone to see flash estimates for inflation and GDP

Second quarter annual growth in the euro area likely accelerated to the fastest since the final quarter of 2015, data out on Tuesday is expected to show. Quarter-on-quarter growth is forecast at 0.6%, unchanged from the prior quarter, while the year-on-year rate is expected to edge up to 2.1% in the flash preliminary reading. Flash estimates of inflation are due one day earlier on Monday. Annual CPI is forecast to remain unchanged at 1.3% in July but excluding food and energy prices, the index is expected to ease slightly to 1.1%.

Other Eurozone data includes the unemployment rate on Monday, retail sales on Thursday and German industrial orders on Friday, all for June, as well as the final July PMI readings on Tuesday and Thursday. The data is unlikely to alter much the existing outlook of the European Central Bank on growth and inflation, while the euro could find fresh momentum to challenge its recent 2½-week high of $1.1776.

Bank of England under spotlight amid split MPC

The Bank of England meets for a two-day policy meeting on Wednesday and Thursday, with the August meeting being particularly significant for a number of reasons. Next week’s meeting will mark one year since the Bank announced its ‘Brexit bazooka’ by cutting rates and extending its asset purchases in response to the shock vote by British voters to leave the EU. One year on, the UK economy has proved more resilient than policymakers anticipated and inflation has jumped to just under 3% from around 0.5% as the pound has plummeted in the forex markets. With several monetary policy committee (MPC) members becoming uneasy about the inflation overshoot, three members voted for a rate hike at the June meeting. The surprisingly tight vote was followed by hawkish remarks from several MPC members. However, one of the hawks, Kristin Forbes, has now left the Bank and replaced by Silvana Tenreyro, who is thought to be more on the dovish side. In addition, the MPC will return to its full 9-member board in September, when the newly appointed Dave Ramsden joins the Bank, who also is thought to be more of a dove than a hawk.

Any further signs on Thursday that the MPC is tilting towards a hawkish stance even as it keeps rates unchanged at 0.25% could lead to fresh gains for sterling. Just as important though will be the BoE’s quarterly inflation report which should reveal the Bank’s latest forecasts on growth and inflation. Given the notable slowdown in UK growth in the first half of the year, it will be interesting to see how confident the Bank is about the growth prospect in the second half and whether a rate hike is warranted.

Ahead of Super Thursday, UK PMI figures will come into focus. The Markit/CIPS manufacturing PMI is out on Tuesday and will be followed by the corresponding construction and services PMIs on Wednesday and Thursday, respectively.

Barrage of US data awaited

The Fed pleased financial markets this week when it signalled it is worried about the recent weakness in inflation, as this means the central bank will follow a less aggressive rate hike path. However, it would only take a couple of strong data to undo that sentiment and there will be plenty of opportunities for that next week. First up on Monday are the Chicago PMI for July and pending home sales for June.

Tuesday’s data will be more crucial with the release of the personal consumption and income figures. Personal income and spending are forecast to remain unchanged at 0.4% and 0.1% month-on-month in June. The core PCE price index – the Fed’s preferred measure of inflation – is released alongside these data and is expected to rise by 0.1% m/m in June. The index had fallen to 1.4% in May, raising doubts about the Fed’s plans to raise rates one more time this year.

However, despite inflation not picking up as expected, growth has started to quicken and survey readings such as the ISM PMIs have been improving recently. The ISM manufacturing PMI for July is out on Tuesday and the ISM’s non-manufacturing PMI is due on Thursday. June factory orders are also released on Thursday and trade numbers are out the next day. The big headline grabber though will be July’s jobs report on Friday. Non-farm payrolls are forecast to increase by a more moderate 187k in July after a robust 222k gain in June. The unemployment rate will likely dip back to 4.3% from 4.4% and earnings growth should accelerate slightly from 0.2% to 0.3% m/m in June. A stronger reading would be positive for the greenback as it would keep the door open for further tightening by the Fed before the year end.

Another country reporting its jobs report next week is Canada. Employment data for July on Friday, along with the June trade balance and the Ivey PMI for July should give some indication as to the likelihood of another rate increase by the Bank of Canada this year.

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