FX Week Ahead: All eyes on BoC

Investors will be looking at another slow week ahead. The Bank of Canada’s monetary policy meeting stands out. The markets are currently expecting the BoC to announce an interest rate hike this week. However, there is an equal chance that the BoC could disappoint market expectations.

On the economic front, inflation theme continues this week. The UK will be releasing its latest inflation data for the month of December. Following the previous BoE meeting to hike interest rates, consumer prices showed no signs of easing. Latest PMI figures for December suggested that prices at factory gate continued to rise.

Australia will be reporting on its monthly jobs data this week as well. The Australian unemployment rate was seen at 5.4% in November, stable for nearly two months. In November, the Australian economy was also seen adding over 61.6k jobs during the month.

Economic data from the U.S. takes a backseat this week with only the building permits data and the weekly unemployment claims standing out. Forward looking indicators such as the Philly Fed Manufacturing index will be coming out alongside the UoM’s consumer sentiment and inflation expectations data.

Here’s a quick recap into this week’s economic calendar for the currency markets.

Bank of Canada – Interest rate hike expected

The Bank of Canada will be meeting this week for its first monetary policy meeting. The market consensus is for the BoC to hike interest rates at this week’s meeting. The hawkish view comes on the back of a solid rebound in the Canadian labor market and other indicators pointing to an increase to tighter conditions.

However, at the same time, the BoC had left interest rates unchanged at the December meeting. The BoC took a very cautious stance at the previous meeting and cited various risks to the economy that included the exchange rate as well as the NAFTA deal that brought about a certain level of uncertainty for the policy makers.

Following the December decision, economic data from Canada showed that the labor market had improved significantly. The Canadian unemployment rate fell to 5.7%, marking a 40-year low and one of the best levels since the 2008 global financial crisis. The average number of jobs added during the month of December was also stronger than expected.

The BoC released its business outlook survey last week. The report showed that Canadian firms were very optimistic and also cited that it was getting difficult to fill jobs. The data suggested that the Canadian labor market might be moving to full capacity. This could potentially see the economy heading into overheating with consumer prices likely to start rising in the near term as well.

However, a lot is left to be seen, if the BoC will base its decision on the recent improvement in the labor markets. Latest export and import data showed that imports continued to outpace exports, but Canadian exports started to gain momentum rising for the second consecutive month.

As a result, the BoC’s meeting will be interesting with the risks balanced.

UK Inflation will be closely watched by the BoE

The UK inflation data will be coming out this week and the data will no doubt be closely watched by the officials at the Bank of England. According to the economists polled, consumer prices in the UK are set to rise 0.5% on a month over month basis in December.

This would bring the annual inflation rate in the UK to 3.0%, slightly down from 3.1% that was registered previously. Core inflation rate is also expected to ease, rising at a pace of 2.6% on the year compared to 2.7% previously.

The PPI input prices are also expected to ease with forecasts pointing to a 0.7% increase compared to the 1.8% increase seen in the previous month.

The inflation data from the UK suggests that despite the Bank of England’s rate hike late last year consumer prices remain stubbornly near the 3.0% level, a full percentage point above the BoE’s 2.0% inflation target rate. Although this week’s inflation data is unlikely to see any policy response from the BoE, continued high inflation will no doubt eventually force the BoE to prepare the markets for another rate hike.