Key points to watch out for:
- ECB to cut rates Thursday, focus on longer-term monetary policy
- But will the Bank of Canada go ahead at its Wednesday meeting?
- US jobs report to be released on Friday, with Fed adamant on output cuts
- OPEC+ plans to extend production cuts to 2025
ECB Prepares to Cut Rates: What Comes Next?
The process of central banks focusing on lowering funding costs has been far from straightforward, although it looks like the European Central Bank will be one of the first to reach its expected destination. If necessary, correct to match the actual date and day: “The ECB meets on Thursday, June 6, to make its June policy decision and is expected to cut its three main interest rates by about 25 basis points. With this, the deposit rate is likely to fall to 3.75%, widening the gap with the Federal Reserve funds rate, which currently stands at a range of 5.25%-5.50%.
To the surprise of many, the euro has resisted speculation about a rate cut and has shown signs of recovery despite the markets’ assumption that it would occur in June. The improving economic situation in Europe is possibly the cause of this rally. However, stronger growth could make it difficult for the ECB to cut rates too soon, especially as inflation pressures have not yet fully subsided.
Hence, the main discussion for ECB policymakers at the June meeting is not so much whether or not to go ahead with the long-awaited cut, but how much and how fast policy will be eased thereafter. Investors expect at least another cut of about 25 basis points after June, but Governing Council members may be leaning towards three or four cuts.
ECB President Lagarde faces the difficult task of balancing expectations, and ultimately, the tone of the press conference will significantly influence market behavior. If she downplays the vision of a rapid rate cut, the euro could well pass the $1.09 level.
In terms of other Eurozone data, final PMI forecasts will be released on Wednesday, June 5, followed by Germany’s industrial production and trade figures on Friday, June 7.
Will the Bank of Canada Consider Cutting Interest Rates?
Amid the difficult inflation backdrop in the United States, the European Central Bank is not the only central bank that is doing better than the Federal Reserve. The Bank of Canada has also made good progress in bringing inflation closer to its 2% target. Headline inflation fell in April to its lowest level in nearly three years at 2.7%, and all three underlying CPI measures have fallen so far in 2024, settling below 3%.
As the labor market in Canada has barely cooled over the past year and economic growth appears to be somewhat sluggish, there is a stronger case for lowering interest rates on Wednesday, June 5, the date set for the Canadian central bank’s meeting. However, markets are only estimating a 25 basis point cut by about 60%, and are pricing in a July hike as much more likely.
The delay in the Fed’s rate cut plans is likely to be a factor, as the Bank of Canada will not want to noticeably diverge from the Fed for fear of a sharp drop in the Canadian dollar. However, the idea of a rate cut by June remains on the table; should the BoC surprise the markets, it will likely signal that this is not the beginning of an aggressive rate-cutting cycle.
The Canadian dollar is in danger of breaking out of its bullish channel versus the US dollar if the BoC cuts rates, as traders will also be paying close attention to the May employment data due on Friday, June 7.
NFP and ISM PMI Will Offer a Relevant Outlook
So far this year, the Fed has suffered several setbacks, with inflation hovering around 3.0%, making the stated 2% target increasingly difficult to achieve. Fed policymakers remain confident that inflation will resume its downward trajectory, although labor market tightness coupled with robust consumer spending has complicated the task.
Recently, however, there have been some signs that the labor market appears to be cooling and consumers appear to be more cautious. The Non-Farm Payrolls report scheduled for Friday, June 7, will be vital in setting estimates ahead of the FOMC meeting scheduled for June 12.
In April, the U.S. economy added 175,000 jobs, which marks a considerable slowdown from the previous month. However, perhaps the most important indication that the hiring spree appears to be winding down is the fact that the unemployment rate has been slowly rising over the past year, reaching 3.9% in April, while wage-related growth has also been stagnating.
If this trend continues in the May report, investors may become more hopeful that the Fed will be able to cut interest rates at least once this year. Indeed, one of the main headaches for policymakers in this “patient” phase of the policy cycle is that the data has been widely scattered and unexpectedly contradictory.
There is a risk that the upcoming economic releases, including the NFP numbers, could further confuse the markets. These include the ISM manufacturing and services PMIs, due on Monday, June 3, and Wednesday, June 5, respectively; JOLTS factory orders and job openings on Tuesday, June 4; and the ADP employment report on Wednesday, June 5. The ISM PMIs, in particular, provide key updates on business momentum, in addition to analyzing price pressures.
Unless the data clears up some of the confusion about the Fed’s monetary policy path, the U.S. dollar is likely to remain sideways against a basket of currencies.
Action-Packed Week Ahead for the Australian Dollar
On Monday, June 3, market attention will focus on the OPEC and non-OPEC countries’ decision on production levels, as the cartel is scheduled to hold online meetings on Sunday. Reports indicate that the oil alliance will extend voluntary cuts of 2.2 million barrels per day, currently set to last until the second half of 2024, while commitments by all OPEC+ members to reduce output by 3.66 million barrels per day are expected to extend into 2025.
Fears have not weighed on oil prices, although an agreement extending cuts into next year would be positive for the outlook.
The latest national GDP figures, awaited by traders, will be released on Wednesday, June 5, potentially influencing the Australian dollar. The Australian economy has been losing momentum in recent quarters, and GDP growth for the first quarter of this year is estimated to come in at a meager 0.2% quarter-on-quarter.
Faster-than-estimated growth would increase the likelihood that the Reserve Bank of Australia will raise rates rather than cut them in future months, which would boost the Australian dollar.
Chinese economic data will be crucial for the Australian dollar this week. The Caixin manufacturing and services PMIs are scheduled for release on Monday, June 3, and Wednesday, June 5, respectively. Additionally, on Friday, June 7, investors anticipate reports of stronger growth in May trade statistics.
Finally, Japanese wage figures due on Wednesday, June 5, could bolster the embattled yen if they show an acceleration in wage growth from April.
