FX Week Ahead: ECB and BoJ meetings. NZ Inflation

Jul 17, 8:53 am

The week ahead will see the U.S. dollar take a back seat as the baton is passed over to the European Central Bank (ECB) and the Bank of Japan (BoJ). Both the central banks are expected to make no changes to monetary policy. However, forward guidance will be a key factor, especially for the ECB.

Elsewhere, New Zealand will be reporting on the quarterly inflation data which is expected to show a slow down following the increase in consumer prices in the previous quarter. Data from the U.S. will be focusing mostly on the housing sector next week. Here’s a quick recap of the key market events to look forward to next week.

ECB Monetary Policy Meeting – All about forward guidance

The European Central Bank’s meeting stands out as the main event this week. Investors will be closely tuned into the ECB’s statement this Thursday in hopes that the central bank will officially announce another taper to its QE program in September.

The ECB’s stance until the recent monetary policy meeting was that it would maintain its QE purchases until it met the inflation target rate. This meant that the ECB had the option to extend the QE purchases beyond December 2017.

However, since the banking conference in Sintra, Portugal, the central bank has turned hawkish. The main challenge from Draghi and the governing council will be to tweak the ECB’s communication as it moves to a less dovish direction. However, this will be a careful and a cautious approach in an effort not to spark another sell off in the bond market.

Besides the ECB’s meeting other data over the week will include the final inflation figures for Jun for the Eurozone. Flash estimates showed that there was a pickup in inflation and this is expected to hold. The German ZEW economic sentiment index is also due this week on Tuesday, ahead of the ECB’s meeting on Thursday.

No major changes expected from the Bank of Japan

The Bank of Japan will be holding its monthly monetary policy meeting on Tuesday. The central bank is widely expected to keep the interest rates steady at -0.10% and will maintain its commitment to pursuing its aggressive monetary stimulus program.

Last week, the BoJ’s determination to keep the 10-year Japanese Government Bond (JGB) yields were tested as the yield briefly climbed above 0.10%. This marked the highest levels since February. The BoJ has been focusing on keeping the yields near zero.

Since the spike, the BoJ responded with a pledge to buy unlimited amount of 10-year bonds thus pushing back the yields slightly lower to 0.9% which also helped to weaken the yen.

The markets will be focusing on the BoJ’s forecasts on inflation as well. At the previous meeting, the BoJ said that it expects inflation to rise to 1.4% during this fiscal year. However, the central bank has a reputation of forecasting errors which could hit its credibility. Given a rather flat reading in inflation over the past two months, the BoJ could very well give downbeat forecasts on inflation.

New Zealand quarterly inflation expected to slow

New Zealand’s quarterly inflation report is scheduled for release on Monday. According to the economists polled, inflation is forecast to rise just 0.2% on a quarterly basis. This follows a 1% increase in the previous quarter. On a year over year basis, inflation is expected to rise 1.9%, slower than 2.2% increase seen previously.

Last week, the food prices data showed a less than forecast increase on the month. The weak pace of increase in food prices was due to a quicker than expected reversal in the price of vegetables. Food prices spiked briefly after the floods but eased back thereafter. The weak pace of price gains in food prices is therefore expected to slow down the annual inflation rate even further.

The scope for a slowdown to 1.8% on a year over year basis will push inflation further away from the price gains witnessed in the previous quarter. This could potentially put pressure on the Kiwi dollar which could turn bearish as prospects of any RBNZ rate hikes continue to fade and be pushed further out.

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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.

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