FX Week Ahead: Janet Yellen speech, the BoC, and UK Jobs report

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Following a busy start to the first week of July, economic data from most of the developed economies take a back seat. Inflation will remain the key theme this week as the US will be reporting on the June consumer price index data. The Fed Chair, Janet Yellen will also be giving her semi-annual testimony to the Congress.

In Canada, the markets are expecting a rate hike from the BoC this week, following the hawkish comments from the central bank officials. In the UK, the monthly jobs report will show whether wages are catching up with inflation or if there is further weakness in the pace of wage growth. Here is a brief list of events to watch out for this week.

Janet Yellen testimony and US inflation report

A somewhat slow week from the US jumps on top of next week’s events with the Fed Chair Janet Yellen set to testify to the Congress on the semi-annual monetary policy testimony.

Past events have shown that Ms. Yellen does not deviate from the main theme and therefore, any dovish remarks are at minimal risk. The Fed chair is, of course, likely to talk about the inflation outlook and more importantly the balance sheet reduction as well as the interest rate normalization.

As such, the overall view from Ms. Yellen could be one that is hawkish for the markets. This should potentially support the US dollar in the near term.

Besides Ms. Yellen’s testimony, the other main event of the week will be the monthly inflation report. The June CPI data comes after nearly three consecutive weak inflation readings. Therefore, the June CPI data will be closely scrutinized to see if it will support the Fed’s view towards continuing its policy and balance sheet normalization.

In May, the headline consumer price index fell to 1.7%. This was after CPI hit 2.3% in January. On a month over month basis, inflation is expected to rise 0.2%, which will keep the year over year inflation rate at 1.7%, which could be viewed as stable.

UK Jobs Report – Wages expected to slow

The UK jobs report alongside the ILO unemployment data will be released mid-week. The UK’s unemployment rate was seen at 4.6% for the past two consecutive months, holding steady. For the most part of this year, the UK’s unemployment rate fell 0.2 points from 4.8% to the current 4.6%.

UK Wage Growth (Source: Tradingeconomics.com)
UK Wage Growth (Source: Tradingeconomics.com)

While the unemployment rate remains steady, the focus will shift to the average earnings. According to economists polled, forecasts are for the year over year average earnings including bonuses to rise just 1.8%. This is slower than the previous earnings increase of 2.1%. Excluding bonuses, the average earnings are expected to rise 1.9%, slightly higher from 1.7% previously.

A further decline in wages could put the BoE policymakers in a tight spot. The BoE Governor Mark Carney had already hinted that the central bank would be looking at hiking interest rates.

However, tightening the monetary policy could have the opposite effect especially if wages continue to fall while inflation moves in the opposite direction. This would put the central bank policymakers at odds.

We have already seen the increasing dissent with the previous BoE meeting showing that three out of five policy makers preferred to hike interest rates by 25 basis points.

Bank of Canada expected to keep interest rates unchanged

The Bank of Canada will be meeting this week for its monetary policy meeting. According to economists polled, there is a strong chance that the central bank will be hiking interest rates.

Therefore, Canadian interest rates are expected to rise this week by 25 basis points, from 0.50% to 0.75%.

Canada Interest Rates: 0.5% (Source: Tradingeconomics.com)
Canada Interest Rates: 0.5% (Source: Tradingeconomics.com)

The hawkish expectation from the BoC comes as a result of the recent uptick in Canada’s key economic indicators. In his most recent interview, the BoC chief Poloz said that inflation could enter an uptrend by the first half of 2018.

He said that policy normalization must start before inflation hits the 2% target.

Policy makers at the BoC also noted that the rate cuts previously had “done their job” inferring that interest rates will rise in the near term. However, the markets are currently pricing in about 50% chance for a rate hike, which increases the risks on both sides.


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