FX Week Ahead: Brexit negotiations & RBNZ

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The week looks rather slow as far as economic data is concerned. The only exception being the RBNZ’s meeting this week and the Bank of Mexico interest rate decision. On the political side of things, the EU and the UK will kick off Brexit talks starting today, which will be rather interesting. Here’s a quick recap of this week’s events and what to expect.

Brexit talks to start on June 19

Nearly one year after the Brexit referendum was held and the UK voted to leave the EU, both parties are set to meet at the negotiating table. The UK had formally triggered Article 50, which is a requirement to being the exit process.

While the EU looks to be well prepared, the political uncertainty on account of calling the snap elections in June by the Theresa May government is likely to put the UK at a weaker position.

There is clearly no strategy or leadership in the UK, which will make the Brexit process rather prolonged. The Conservatives continue to maintain the majority, however, they are short of the full majority required to form the government.

In the event that there is some consensus and a coalition is formed, the Conservative Party will need to be accommodative to its coalition parties in order to agree on any strategy.

Given the circumstances, expect a bit of volatility in the British pound. The economy is also likely to come under pressure as inflation rises sharply, but the wages are failing to keep up with the pace. This squeeze on households is likely to impact spending which could, in turn, affect the GDP of the UK.

The Bank of England is already in a policy dilemma with interest rates near 0.25% while some policy makers voted last week in favor of hiking interest rates.

RBNZ to stay on the sidelines

The Reserve Bank of New Zealand (RBNZ) will be meeting on Wednesday. Economists expect to see no major changes from the central bank as far as interest rates are concerned. Therefore, the RBNZ’s Overnight Cash Rate (OCR) will remain at 1.75%.

During the May policy review, the central bank maintained that the recent surge in inflation was due to temporary factors and expects to see further softening before inflation can begin to rise again. It could maintain the phrase “monetary policy will remain accommodative for a considerable period.”

The RBNZ could, therefore, take the cautious approach and focus on making its statement balanced, noting that interest rates could move in either direction. Since the May meeting, economic developments in New Zealand has remained largely stable.

The recent weak GDP figures are also likely to figure in the RBNZ’s statement. Growth in the December quarter was lower than expected with the previous quarter ending September being revised down as well.

The latest GDP numbers for the March quarter showed that growth was slower, rising just 0.5%. This was also below the economists’ forecasts as well as that of the RBNZ. The RBNZ forecast a 0.9% increase in GDP.

EUR and USD: Fedspeak & Flash PMI’s

The week is relatively quiet from the US. This will, however, be made up by a number of Fed speeches. Members who will speak this week include Fischer, Dudley, Evans, Rosengren, Kaplan, Mester and Bullard.

The members are likely to give more clarity to the markets on the proposed balance sheet reduction and the rate hike in June as well as the proposed one more rate hike.

In the eurozone, the flash manufacturing and services PMI will be in focus. With fewer political risks in the region, the focus will shift towards the growth metrics with the markets looking for clues from the flash indicators for any uptick in the economy.

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