FX Week Ahead Overview:
- The Fed rate decision on Wednesday will likely keep volatility elevated throughout the week.
- The BOJ rate decision on Friday has increased importance now that JGB 10-year yields have started to break through the 0.25% threshold.
- Eurozone inflation data on Friday may only deepen concerns about fragmentation across European bond markets.
For the full week ahead, please visit the DailyFX Economic Calendar.
06/15 WEDNESDAY | 18:00, 18:30 GMT | USD Federal Reserve Rate Decision & Press Conference
Rates markets have evolved sharply in recent days, following the release of the May US inflation rate (CPI) on Friday. One week ago, 148-bps were priced-in through the end of 2022; at the start of this week, 201-bps are discounted through the end of the year. Markets believe the Fed will raise rates by 50-bps at their June meeting, but there are rising odds that a 75-bps or even a 100-bps rate hike will be levied. Fed Chair Jerome Powell’s press conference will be critically important, as recent data will likely provoke a significant change in the FOMC’s Summary of Economic Projects (SEP) as well. Heightened volatility across asset classes up to and through Wednesday afternoon should be anticipated.
06/16 THURSDAY | 01:30 GMT | AUD Employment Change & Unemployment Rate (MAY)
The Australian economy continues to add jobs at a relatively torrid clip, putting more pressure on the Reserve Bank of Australia to raise rates rapidly. According to a Bloomberg News survey, Australia added +25K jobs in May, dropping its unemployment rate from 3.9% to 3.8% in the process. The relatively good news may come at a needed moment for the Australian Dollar, which has been sucked into the maelstrom of a broadly risk-off market. The data will only further encourage the RBA to raise rates quickly in the second half of 2022.
06/16 THURSDAY | 11:00 GMT | GBP Bank of England Rate Decision
Despite BOE policymakers signaling at the May rate decision that they are equally concerned with downside risks to growth as they are with upside risks to inflation, rates markets have had a rethink in recent weeks. Since mid-May, amid signs that the rises in food and energy prices won’t release anytime soon, rates markets have dragged forward BOE rate hike expectations for the remainder of 2022a much needed source of support for the British Pound.
UK overnight index swaps (OIS) are discounting an 117% chance of a 25-bps rate hike in June (a 100% chance of a 25-bps hike and a 17% chance of a 50-bps hike). Rates markets are still pricing in a 25-bps rate hike at every meeting for the rest of 2022. But there has been a subtle shift: it’s a faster pace than what was expected in mid-May: the expected terminal rate for the BOE in 2022 now sits at 2.450%, up from 2.099% approximately three weeks ago.
06/17 FRIDAY | 03:00 GMT | JPY Bank of Japan Rate Decision
Bank of Japan rate decisions usually don’t warrant much consideration, but this time is different as the Japanese Yen has hit its lowest level versus the US Dollar since 1998: markets are starting to break the BOJ’s commitment to keeping the JGB 10-year yield capped at 0.25%. The forthcoming rate decision is loaded with risk, as one of two things can happen: one, the BOJ can recommit to keeping yields capped, which means the Yen will take another leg lower; or, two, the BOJ throws in the towel on its QQE with yield curve control policy, which could unleash a rampant rebound by the Yen. Regardless of the outcome, fireworks are expected.
06/17 FRIDAY | 09:00 GMT | EUR Inflation Rate (MAY)
The European Central Bank’s June rate decision proved to be a bit of a communication error, with ECB President Christine Lagarde fumbling questions on how bond market fragmentation will be handled in the coming months. But the die has been cast, so to speak: the final May Eurozone inflation rate (HICP) is due in at +8.1% y/y from +7.4% y/y, and the core reading is expected at +3.8% y/ y from +3.5% y/y. What was previously a source of strength for the Euro – rising short-end bond yields across the Eurozone – has now turned into a source of weakness – rising long-end bond yields in the periphery – that could raise questions of fiscal stability in countries like Greece, Italy, and Spain.
— Written by Christopher Vecchio, CFA, Senior Strategist