FX Week Ahead: RBNZ Meeting, US Inflation, and Bank of Mexico Meeting

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The markets will be looking to a rather slow week of trading. The week ahead will see only the RBNZ’s monetary policy meeting as the key event of the week. No changes are expected from the RBNZ with the OCR steady at 1.75%.

The Bank of Mexico will be another central bank that will be holding its monetary policy meeting this week. No changes are expected from the Mexican central bank; however, inflation data which is due to be released this week is expected to rise further.

In the US a slow week will see Friday’s consumer prices data coming out. Inflation is forecast to show a modest increase.

RBNZ to keep OCR unchanged, downside risks prevail

The Reserve Bank of New Zealand’s monetary policy meeting this week will see the central bank holding the OCR unchanged at 1.75%. The central bank is also likely to reiterate that its current monetary policy will be on hold for the foreseeable future.

The RBNZ’s policy statement comes with the dovish risks considering that inflation has slipped below the lower band of 2%. At the most recent inflation report, New Zealand’s consumer prices were seen rising just 1.7%, after briefly rising above 2% in the first quarter of the year.

Some part of the NZD’s appreciation comes due to the fact that traders have been anticipating an interest rate hike from the central bank. The RBNZ could thus use this monetary policy meeting to expunge any hints of a rate hike with its dovish forward guidance.

The next main data point for the New Zealand dollar will be the second quarter GDP report. This will only be released in September, which gives further room for the RBNZ to stay on the sidelines.

There is also a possibility that the central bank could refer to the higher exchange rate of the New Zealand dollar, which is expected to further dampen inflation expectations.

The NZD inflation expectations will be released today and could signal where consumer prices are heading in the future.

July consumer prices expected to rise

The July inflation report will be released this week. The data is likely to provide further clues for the Federal Reserve. The Fed has stated that the current weakness in inflation is only transitory. However, various other measures of inflation continue to show weakness.

United States Consumer Prices: 1.6% June 2017 (Source: Tradingeconomics.com)
United States Consumer Prices: 1.6% June 2017 (Source: Tradingeconomics.com)

Headline consumer prices are forecast to rise 1.8% in July. This would mark a significant increase from the 1.6% increase in consumer prices seen the month before. The core inflation rate is expected to remain steady at 1.7%. The core inflation rate would be in line with the core PCE inflation reading of 1.5% which was seen in July.

Besides the inflation data, some Fed members are also expected to speak over the week. Members include NY Fed President Dudley, Dallas Fed President Kaplan and Minneapolis Fed president Kashkari. All three members are FOMC voting members, and it is likely that the speeches will be under focus. The Fed is expected to begin its balance sheet reduction from September.

Bank of Mexico expected to keep interest rates unchanged

The Bank of Mexico will be meeting this week for its monetary policy meeting. The central bank is widely expected to keep interest rates on hold at 7.0% at this week’s meeting. The central bank is also likely to announce an end to its monetary tightening policy, which suggests a period of stability in interest rates.

The central bank’s meeting comes just a day before the Mexican inflation data is released. According to economists polled, Mexico’s inflation rate is expected to rise slightly to 6.4%. In the previous month, Mexico’s inflation rose to 6.3% on a year over year basis.

Inflation continued to surge strongly in Mexico with June’s increase in consumer prices rising for the twelfth consecutive month.

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