Weekly Market Outlook: Focus on RBA and RBNZ

RBA expected to cut interest rates

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The week ahead will be somewhat slower with most of the attention turning to the Asia Pacific region. On the cards, the Reserve Bank of Australia and the Reserve Bank of New Zealand will be holding their respective monetary policy meetings this week.

The RBNZ is forecast to maintain a steady ship, while the RBA is forecast to cut rates.

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On the economy front, data from the UK will cover the GDP figures alongside manufacturing and industrial production numbers. Both industrial and manufacturing output could rise at a slower pace after rising sharply in the previous period.

The Canadian labor market report will be due on Friday. Recent economic data saw the economy cooling but growth in the labor market remains strong so far. The unemployment report is forecast to maintain a steady trend.

Fed Chair, Jerome Powell will be speaking this week at an event. Powell’s speech will be one to watch as investors look for clues into the central bank’s forward guidance. Following last week’s decision to leave rates steady with neutral forward guidance, Powell’s speech could be crucial for the USD this week.

Here’s a quick recap of what’s to come in the currency markets this week.

RBNZ Expected to Keep Rates on Hold

The Reserve Bank of New Zealand will be holding its monetary policy meeting on early Wednesday. Economists forecast that the RBNZ will be leaving the overnight cash rate unchanged at 1.75%. This would mark another monetary policy meeting where the central bank will be sitting on its hands.

Economic data from New Zealand continues to remain bleak which raises the prospects of a surprise decision from the central bank. GDP growth in New Zealand remains weak, falling short of the RBNZ’s expectations.

Inflation also remains stubbornly below the central bank’s 2% inflation target rate. The prospect rises for a rate cut amid the RBNZ’s previous forward guidance.

In March, the central bank gave a more easing bias. In its previous statement, the RBNZ signaled that the prospects of a rate cut are much higher than a rate hike. Even if the RNBZ does not cut rates, there is a strong chance that its forward guidance will be a lot more dovish than previous meetings.

Reserve Bank of Australia to Cut Rates

Investors will be closely watching the RBA’s monetary policy meeting this week. Heading into the event, the markets expect the RBA to lower rates by 25 basis points. This would bring interest rates in Australia to 1.25%.

The changes to the RBA’s interest rate come nearly two years since the RBA kept rates steady at 1.50%. The central bank has been steadily lowering interest rates since 2008.

The prospects of a rate cut grew louder as the inflation data for the first quarter fell sharply. Australia’s trimmed mean CPI was seen at 1.6% on the year ending in the March quarter. It remains well below the 2% – 3% inflation target band. At the moment, the markets are pricing in a change of a 45% probability for a rate cut. The Australian dollar was already declining in anticipation of the rate cut from the central bank this week.

US Inflation and Trade Balance Data in Focus

This week will be somewhat slower from the US. Economic data is expected to cover inflation and trade balance figures. Expectations are for the trade balance figures to deteriorate somewhat slightly. However, this won’t have much impact given that trade balance figures have been improving significantly.

US inflation data is due out later this week. Headline inflation is expected to rise by 0.4% on the month in April. This marks a steady pace from the month before. The core inflation rate is forecast to rise 0.2%, up from 0.1% in March.

The increase in inflation comes amid higher oil prices which could give a boost to consumer prices. Meanwhile, the increase in core inflation comes on speculation of higher transportation costs and stronger housing market data.

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