Central Bank Meetings Ahead, Forex Outlook Cloudy

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Markets Edge Higher Ahead of Central Bank Meetings [Video]

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Big changes since yesterday brought the risk-on outlook back on centre stage. European bourses opened higher as investors look ahead to key central bank meetings, while trade tensions and the risk of a no-deal Brexit have cooled for now.

Trump Fires Bolton
In the US, President Trump fired John Bolton, a known ideological hard-liner heavily against China and Iran, which instantly changed the tone between the US and China. Based on what Hu Xijin knows, China is going ahead with important measures that will ease the negative impact of the trade war. It looks like Trump has shifted his strategy from “tough” to “get elected again” and for that, he needs to avert a recession at all costs.

Risk markets globally are still digesting this news with moderate moves, but in my view, the outlook for a shift in sentiment changed from negative to positive. However, this change may well be short-lived as it still entails a big IF solutions and agreements are really found and agreed upon between China and the US.

Forex Preview: Safe Haven Currencies Edge Lower
The Japanese yen fell on Wednesday as the rush into safe-haven assets during the summer continued to unwind on the back of rising risk appetite, while the euro paused before Thursday’s European Central Bank meeting. It appears the repricing in bonds and yields hint that traders are questioning the expectation of an extremely dovish stance by the ECB tomorrow, which could help the EUR further up. The USD also traded mostly flat and this shift in sentiment definitely eases the pressure of dovish expectations on any central bank.

Oil Prices Hit by Bolton Incident by Later Recover
Yesterday, President Trump abruptly fired John Bolton, his national security adviser, with whom he had fundamental disagreements over Iran, North Korea and Afghanistan. Trump’s decision sent oil prices temporarily lower as markets questioned whether diplomatic agreements with Saudi nations can be maintained. Oil prices later traded higher after an industry report said U.S. crude stockpiles fell last week by more than twice the amount that analysts in a Reuters poll had forecast.

Gold Prices Steady, BTC Dips
Gold prices steadied around $1490 as risk appetite increased and investors gradually turned away from risk assets Gold is likely to see further correction today as this change in sentiment is taking its toll on all safe havens. Elsewhere, BTC is looking increasingly bearish dipping briefly below the 10k this morning a quick move testing the 100-day MA for yet another time.

Central Bank Meetings Ahead: RBA, BoC and ECB

The week ahead will be a busy one with three central bank meetings lined up. The RBA starts off the week with its monetary policy meeting, followed by the Bank of Canada and eventually handing over the spotlight to the ECB.

On the economic front, important GDP numbers are expected out of Australia and Japan. For AUD, it is going be a busy week as retail sales numbers are also expected during the week. The RBA Governor Lowe is expected to speak on two separate occasions as well which could keep the volatility alive in the AUD.

The US dollar will be taking a backseat, but a lot of Fed speeches are lined up. This includes FOMC voting members, Kashkari and Brainard among others. The ISM’s non-manufacturing PMI will be the main data point for the USD this week.

Here is a brief recap on what to expect from the currency markets in the week ahead.

ECB Meeting – Will Draghi respond to the market expectations?

After nearly two months since making his hawkish pitch in Sintra, Portugal, all roads lead to the ECB’s monetary policy meeting this week. Coming off the summer break, the ECB’s governing council will be looking at one of the most crucial policy meetings this year.

The speculative rally in the euro also seems to be completed as the common currency hit 1.20 against the US dollar last week before traders booked profits. The main question is whether investors will be able to build fresh long positions in the common currency. This is unlikely at this point and ahead of the ECB’s meeting.

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The central bank had previously signaled that it would be looking into shaping the statement so as not to bring about too much volatility in the financial markets. Some corners argue that a stronger exchange rate at this point is not warranted. On the other hand, economic indicators continue to suggest that the Eurozone’s economic recovery is well on its way.

Latest inflation estimates showed that consumer prices accelerated at a pace of 1.5% on the year in August. Still, core consumer prices barely budged, maintaining the 1.2% increase on a yearly basis. This is still a far cry from the ECB’s inflation target rate of 2%. Officials are likely to tread a cautious path. The ECB’s current QE purchases will likely run its course in December 2020.

With the German elections also lined up for later this month, there could be some chance that the ECB will kick the can down the road and postpone any major decisions until the election clouds lift over Germany. This could mean that the markets could feel slightly disappointed, although Draghi is likely to balance this during the press conference.

Bank of Canada expected to hold rates steady, but could send hawkish signals

The Bank of Canada will be another important central bank meeting to watch out for this week. The central bank had previously hiked rates in July and was the first central bank to follow up on its hawkish forward guidance given in Portugal. The BoC is also the second central bank among the G7 economies to hike interest rates.

Given that the BoC has hiked rates quite recently; this week’s meeting could see the BoC holding back from making further hikes. The markets are currently expecting another rate hike from the BoC by the end of this year. This view gained momentum after last week’s GDP report surprised.

According to Statistics Canada, the economic activity expanded at a pace of 0.3% on a month over month basis in June. This was higher than the forecasts of a 0.1% increase. With June, the Canadian economy was seen expanding for eight consecutive months.

Among the various sectors, there was a notable increase in 14 out of the 20 sectors driving growth. Most of the GDP gains came from higher consumption, which underlined the hawkish forward guidance from BoC’s Poloz. There was also a pick in nonresidential construction which rose 2.9%, reversing the 2% declines from May. Retail trade sector also expanded for six consecutive months, rising 0.8% in June.

While the BoC’s meeting will be clearly overshadowed by the ECB meeting, we can expect to see the central bank lay the ground work for the next rate hike.

By John Benjamin, Orbex

John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

FOREX EU news, opinions, analyses, research, quotes, charts, or other information on this website is provided as general market commentary, and does not constitute investment advice. FOREX EU will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Post-RBA AUD/USD Rebound Stalls as S&P Cuts Rating Outlook to Negative

Australian Dollar Talking Points AUD/USD tagged a fresh monthly high (0.6208) as the Reserve Bank of Australia (RBA) abandoned the dovish forward guidance for monetary policy, but the recent rebound in the exchange rate appears to have stalled as Standard and Poor’s cuts Australia’s credit rating outlook to ‘negative’ from ‘stable.’ Post-RBA AUD/USD Rebound Stalls as S&P Cuts Rating Outlook to Negative AUD/USD showed a bullish reaction to the RBA meeting even though the central bank kept the official cash rate (OCR) at the record low of 0.25% as Governor Philip Lowe and Co. tamed speculation for . (full story)

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Daily forex outlook. Adding more risk

There are a couple of central bank decision to watch today, primarily Canada at 15:00 GMT. The Canadian economy has gone through a rough ride recently, with recent indicators suggesting some stabilisation, but concerns remain and the market is pricing the risk (around one-third) that rates are cut this year. The recent reversal of the currency is also a factor likely to be discussed at the meeting today, given the Canadian dollar is nearly 10% higher vs. the US dollar from the USDCAD highs seen in January. This makes it the strongest major over this period, but the recovery is not surprising given the changes to the risk environment and oil price over this period. It’s going to be the tone of the statement that determines the currency reaction. For New Zealand, the scope for a near-term move is a lot less, although there are a couple of institutions in the market thinking that they will cut rates from the current 2.25%, so it’s worth keeping an eye on the outcome.

Eslewhere, we are seeing a modest bid on the dollar at the start of the European session, with this being seen most notable on the risk currencies, such as the Aussie, which is pushing towards the 0.75 level. On the other side, USDJPY hardly moving. The single currency is more reluctant to join in ahead of tomorrow’s crucial ECB meeting, where further policy measures are expected.

Source: Simon Smith, Chief Economist FxPro.

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