Thursday could have the most important data release for Forex markets this week. April Flash PMIs will provide some valuable insight into where inflation pressures are trending as a result of the war in the Middle East. They could determine the market’s positioning ahead of next week’s major central bank rate decisions.
So far this week, markets have been in a holding pattern, reacting to the latest developments in negotiations between the US and Iran. However, data is becoming more important to price action as traders try to anticipate the financial fallout of the war. This is particularly notable in gold, which has trended pretty much sideways, waiting for a catalyst.
Economic Performance Key for Central Banks
The three major data points that could move markets are the Flash PMIs from the UK, the Eurozone, and the US, as they all have central bank meetings next week. The data will give insight into whether inflation pressures are increasing or might have already peaked. That could alter how markets price in the evolution of interest rates in the coming months.
In general, the expectation is for PMIs to balance around 50, the separation between expansion and contraction. Businesses are also awaiting clarity on what to expect, which has left the economy in something of a holding pattern. A significant deviation from expectations could move markets, particularly if it implies a shift in rate outlook.
Eurozone Economy Sputters
First to report is the Eurozone, with a flash March Composite PMI anticipated to dip to 50.3 from 50.9 in March. Notably, Services PMI is projected to fall to 49.8, entering contraction. This is an unusual situation where services underperform the industry, but it reflects energy prices affecting service providers first.
Markets are pricing in up to two rate hikes from the ECB this year to head off inflationary pressures. But if price growth has abated, then those odds could diminish. However, this might not weaken the Euro, as it would give the shared economy more room to recover and could even strengthen the currency if the conditions are just right.
Pound Weighing Growth Outlook
Despite having more access to energy, UK manufacturing flash PMI is expected to fall into contraction at 49.9, down from 51.0 a month earlier. The services component is anticipated to drop to 50.0 from 50.5. This implies a reversal from the earlier GDP gains seen in February.
Futures suggest between one and two rate hikes from the BOE this year, as inflation remains above target. But a disappointment in the PMI data could indicate the economy continues to soften. That could raise the case for not hiking rates and weigh on the pound.
US Economy in Limbo
US composite flash PMI is expected to remain in expansion, at a minimum 50.0, compared to 50.3 prior. However, that’s largely attributed to a drop in services struggling with higher fuel prices. Manufacturing is forecast to stay firmly in expansion, aided by domestic oil production.
Markets are putting the odds of a Fed rate cut this year at 50-50 as confirmation hearings for Chair Jerome Powell get underway. Softer performance here could hurt the dollar, but it would raise the odds of a cut and support gold.
