European Union Foreign Exchange

Central Bank Meetings Ahead: RBA, BoC and ECB

The week ahead will be a busy one with three central bank meetings lined up. The RBA starts off the week with its monetary policy meeting, followed by the Bank of Canada and eventually handing over the spotlight to the ECB.

On the economic front, important GDP numbers are expected out of Australia and Japan. For AUD, it is going be a busy week as retail sales numbers are also expected during the week. The RBA Governor Lowe is expected to speak on two separate occasions as well which could keep the volatility alive in the AUD.

The US dollar will be taking a backseat, but a lot of Fed speeches are lined up. This includes FOMC voting members, Kashkari and Brainard among others. The ISM’s non-manufacturing PMI will be the main data point for the USD this week.

Here is a brief recap on what to expect from the currency markets in the week ahead.

ECB Meeting – Will Draghi respond to the market expectations?

After nearly two months since making his hawkish pitch in Sintra, Portugal, all roads lead to the ECB’s monetary policy meeting this week. Coming off the summer break, the ECB’s governing council will be looking at one of the most crucial policy meetings this year.

The speculative rally in the euro also seems to be completed as the common currency hit 1.20 against the US dollar last week before traders booked profits. The main question is whether investors will be able to build fresh long positions in the common currency. This is unlikely at this point and ahead of the ECB’s meeting.

The central bank had previously signaled that it would be looking into shaping the statement so as not to bring about too much volatility in the financial markets. Some corners argue that a stronger exchange rate at this point is not warranted. On the other hand, economic indicators continue to suggest that the Eurozone’s economic recovery is well on its way.

Latest inflation estimates showed that consumer prices accelerated at a pace of 1.5% on the year in August. Still, core consumer prices barely budged, maintaining the 1.2% increase on a yearly basis. This is still a far cry from the ECB’s inflation target rate of 2%. Officials are likely to tread a cautious path. The ECB’s current QE purchases will likely run its course in December 2017.

With the German elections also lined up for later this month, there could be some chance that the ECB will kick the can down the road and postpone any major decisions until the election clouds lift over Germany. This could mean that the markets could feel slightly disappointed, although Draghi is likely to balance this during the press conference.

Bank of Canada expected to hold rates steady, but could send hawkish signals

The Bank of Canada will be another important central bank meeting to watch out for this week. The central bank had previously hiked rates in July and was the first central bank to follow up on its hawkish forward guidance given in Portugal. The BoC is also the second central bank among the G7 economies to hike interest rates.

Given that the BoC has hiked rates quite recently; this week’s meeting could see the BoC holding back from making further hikes. The markets are currently expecting another rate hike from the BoC by the end of this year. This view gained momentum after last week’s GDP report surprised.

According to Statistics Canada, the economic activity expanded at a pace of 0.3% on a month over month basis in June. This was higher than the forecasts of a 0.1% increase. With June, the Canadian economy was seen expanding for eight consecutive months.

Among the various sectors, there was a notable increase in 14 out of the 20 sectors driving growth. Most of the GDP gains came from higher consumption, which underlined the hawkish forward guidance from BoC’s Poloz. There was also a pick in nonresidential construction which rose 2.9%, reversing the 2% declines from May. Retail trade sector also expanded for six consecutive months, rising 0.8% in June.

While the BoC’s meeting will be clearly overshadowed by the ECB meeting, we can expect to see the central bank lay the ground work for the next rate hike.

By John Benjamin, Orbex

John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.