Weekly Market Outlook: All Eyes on the RBA

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The economic calendar for the week ahead will start off a new trading month. Focus shifts to the important economic indicators for the month of May. These will shed light on how the global economy has fared amid a lot of uncertainties in the market during the month.

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The Reserve Bank of Australia, which has remained on the sidelines so far, is widely tipped to cut rates by 25 basis points this week. The rate cut decision comes after the markets have been speculating a rate cut since the previous meeting. The question remains on whether the RBA will follow through on the market expectations or whether it chooses to remain on the sidelines once again.

The European Central Bank will also be holding its monetary policy meeting this week, but no changes are expected. With the current global uncertainty and the fact that ECB President Mario Draghi’s term nears to an end, the ECB is likely to simply follow through on its previous forward guidance rather than surprise the markets.

On the economic front, data from the US. will be key as the ISM’s manufacturing and non-manufacturing PMI alongside the May jobs report is on the cards this week.

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

RBA’s Rate Cut More Likely this Time

The Probability for a rate cut has increased. This comes after the markets fell flat at the previous meeting when the RBA left rates unchanged at 1.50%. The RBA will be meeting on Tuesday and expectations run high for a quarter basis point rate cut. This will bring the Australian interest rates to 1.25%, marking a fresh historic low.

The speculation for a rate cut increased after RBA Governor Lowe mentioned just a week ago that a lower cash rate would support Australia’s labor market and probably spur growth as well. Lower interest rates are also seen as an attempt to stoke inflationary pressures.

Later in the week, following the RBA’s decision, Australia’s first quarter GDP results will be coming out. Expectations point to a 0.4% increase in the GDP on a quarterly basis. This would see the economic growth doubling from 0.2% in the fourth quarter of 2018.

But there is scope for the GDP growth to come below estimates. This comes after the Q1 Capex spending data revealed that equipment investment in the three months to March 2019 fell 0.5% marking an annual rate of 2.4%.

ECB to Remain on the Sidelines

The European Central Bank’s monetary policy meeting this week will see no major changes to the bank’s forward guidance. Amid the lack of any data, investors expect to hear more about the ECB’s Targeted Long Term Refinancing Operations (TLTRO) details such as pricing.

Besides the ECB’s monetary policy meeting, this week will see the inflation estimates as well as the monthly PMI numbers coming out. Focus will shift to the inflation data as it will reveal the true underlying price pressures as the seasonal Easter holiday effect starts to fade.

As a result, inflation in the Eurozone for May could rise at a slower pace of 1.4%, after rising 1.7% in April. Core inflation rate which excludes the volatile food and energy prices could rise just 1.0%. This follows a 1.3% increase in April.

The decline in the inflation report is likely to put pressure on the ECB officials after ending the QE program last year. Consumer prices are still way off the ECB’s 2% inflation target rate.

Busy Week for the US

The first week of the month will no doubt come with some high ticket items. Economic data from the United States this week will cover the manufacturing and services PMI alongside the monthly jobs report.

Forecasts point to the manufacturing activity as measured by the ISM to rise from 52.8 to 53.0 in May. ISM’s non-manufacturing PMI activity could rise from 55.5 in April to 55.6 in May.

The jobs report for May could see the US unemployment rate holding steady at 3.6%. Expectations for the payroll numbers are in the range of 190k–180k jobs for the month. Average hourly earnings are tipped to rise 0.3% on the month.

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