Central Banks In Spot Light, Busy Week Ahead for Traders

The US dollar plumbed a fresh four-week trough against a basket of currencies at the beginning of this week, after Federal Reserve Chair Janet Yellen said she expects the economic recovery to continue but gave no indications on the timing of a next rate increase. Yellen’s perceived dovish comments followed last Friday’s release of shockingly weak US jobs data. On Thursday, the greenback recovered after a report showed jobless claims in the US unexpectedly fell by 4,000 to 264,000, compared to expectation of a rise by 3,000 to 270,000.

Oil prices remained near 2016 highs of above $50, buoyed by a fall in U.S. crude inventories, a weaker dollar and strong demand amid the ongoing supply outages in Nigeria. Data from the U.S. Energy Information Administration (EIA) showed U.S. crude stocks last week fell by 3.2 million barrels versus expectations for a 2.7 million-barrel drawdown, marking their third consecutive weekly fall. Oil has also benefited from a surge in commodities demand, as easing expectations about the possibility of a near term U.S. rate hike reduced dollar strength. Strong import data in May from China, the world’s second-largest oil consumer, also added to the current bullish sentiment. Meanwhile, multiple attacks on key pipelines and facilities have reduced Nigeria’s daily oil output to around 1 million barrels. However, oil prices paired some gains on Friday, as a strong U.S. dollar capped profit-taking in crude by investors.

Sterling is increasingly volatile as the June 23 referendum gets closer and polls predict different results. On Monday, two polls showed a majority favour leaving the EU, which sent the UK currency to the lowest level in 3-weeks against the U.S Dollar. However, the Pound recovered some ground the next day after a couple of new polls showed the “Remain” camp was holding a narrow lead. On Wednesday, the UK industrial and manufacturing production data both posted monthly growth of 2.3% and 2.0% respectively, despite previous expectation that they remain unchanged. The U.K. Office for National Statistics reported a day later that the trade deficit narrowed to £3.29 billion in April. Sterling gained as the mood of ‘Brexit’ pessimism eased somewhat.

Data earlier that Germany’s trade surplus widened to €24.0 billion from revised €23.7 billion in March. Meanwhile, European Central Bank President Mario Draghi warned Thursday that uncertainty over the future of the euro is holding back progress in the region.

The Australian dollar was weaker, with AUD/USD down 0.77% at 0.7431, while NZD/USD gained 0.59% to 0.7135, after hitting one-year highs of 0.7147 earlier in the day. The kiwi strengthened broadly after the New Zealand Reserve Bank held interest rates steady, surprising some investors who had been expecting a rate cut. Elsewhere, USD/CAD added 0.18% to 1.2715.

Overall, the macroeconomic calendar has been light this week, with attention shifting towards June 15th Fed’s policy meeting.

Next Tuesday, UK Inflation data will be released, forecast to remain below the BOE’s 2% target since commodity prices fell sharply while the sterling strengthened.  On the same day, US retail sales will come out with expectation of a 0.3% dip in retail sales and a 0.6% gain in core sales.

Wednesday is a heavy data day with UK jobs report, US PPI, Australian employment data, and the focus of the week, US Fed decision. A rate hike is likely off the cards for this June meeting. The risk of a Brexit as well as the poor jobs report means that the data dependent Fed will be cautious. We could get hints about the decision in July.

On Thursday, the central banks of Japan and England will release their interest rate decisions. While the Bank of Japan is expected to keep its monetary policy unchanged but leaving the door open to additional easing measures, the UK rate seems to be more dovish due to a slowdown in GDP growth and the upcoming Brexit referendum.

Friday will see the release of Canadian inflation data and ECB President Mario Draghi speaks in Munich on ECB’s monetary policy amid doubts over the future of the euro, given the headwinds faced by the EU on political and economic levels.

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