FX Week Ahead: RBNZ and BoE take the stage

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The week will see a continuation of the key economic indicators from across the world. The week starts off with the French election results in the main backdrop, and the baton will be passed on to Germany which will be holding elections next.

On the economic front, China will be reporting the monthly inflation figures on Wednesday while it will be a busy week for the UK. Bank of England monetary policy meeting is scheduled for Thursday which will also see the release of the manufacturing production numbers and the central bank’s inflation figures.

The Reserve Bank of New Zealand will also be holding the monetary policy meeting this week, but no changes are expected to the overnight cash rate.

US Data: Inflation set to bounce back

After a rather soft print in March, inflation, as measured by the consumer price index, is all set to post a bounce back in April as well as the producer price index. In March, both gauges of inflation fell on account of the so-called “Easter effects” and lower energy prices.

The April inflation data is expected to show a reversal from March’s dip. Core consumer prices are expected to rise 0.2% on a month over month basis, putting the annual inflation rate back to the 2% year over year threshold. The headline consumer prices, on the other hand, are expected to rise 0.3% on a monthly basis, pushing the annual inflation rate to 2.3%.

U.S. Consumer Prices, March 2017 (BLS)
U.S. Consumer Prices, March 2017 (BLS)

The retail sales numbers for April are also due this week. Most of the gains in the retail sector came on the back of higher consumer confidence and private consumption. With initial indicators pointing to a pickup in the economy during the second quarter, retail sales are expected to rise as a result to reflect the same.

RBNZ expected to keep the OCR unchanged

Despite stronger than expected fundamentals in recent months such as inflation and the latest labor market figures, the RBNZ is expected to maintain an easing bias.

Market expectations for a rate hike from the RBNZ are still far off, with some estimates pointing to a rate hike due only next year. The central bank projects that the first rate hikes will come in 2019, but this could be due for an adjustment either at this week’s meeting or in the near future.

Available data so far infers that the RBNZ is likely to remain muted on interest rates, which currently stands at 1.75%. But on the other hand, the economic projections are likely to be upgraded in the near term.

A combination of higher inflation data, a weaker exchange rate in the NZD and the strong terms of trade are factors that the RBNZ could consider at this week’s monetary policy meeting.

Besides the RBNZ’s meeting this Wednesday, the quarterly retail sales figures are due over the weekend.

Bank of England to remain on the sidelines

If Brexit wasn’t the only issue, the Bank of England would now be also staring at the uncertainty from the June elections. With the political factors clearly overshadowing the economics, the central bank meeting this week is likely to remain a non-event.

The BoE will also be releasing its quarterly inflation outlook and economic forecasts. While the central bank got it nearly right on inflation, growth forecasts are likely to be tweaked, with the first quarter GDP growth of 0.3%, falling short of the central bank’s 0.5% estimates.

The Bank of England officials are expected to keep the main interest rates unchanged at 0.25%, while also keeping the central bank’s asset purchase program steady at the rate of 435 billion. The UK’s economy has remained somewhat stable although the first quarter GDP growth rate is likely to be considered by the policy makers.

Still, despite the weakness in the GDP, the latest PMI numbers suggest that growth was likely to remain resilient. With the UK’s general elections due in June, the Bank of England is unlikely to steer away from its current monetary policy, including forward guidance.

Besides the UK elections, the overall backdrop of the Brexit negotiations will continue to weigh on the Bank of England officials. The inflation figures for the month of April is due only the week after and there is a broad consensus that inflation could edge higher due to the seasonal Easter holiday effects.

Therefore, while inflation is likely to remain a key issue for the central bank officials, the political uncertainty is, of course, going to keep officials on the sidelines at this week’s meeting.

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