Key points to watch out for:
- Underlying CPI in focus for dollar traders
- Eurozone: CPI in focus as June cut awaits
- Tokyo CPI could hamper BoJ’s monetary policy plans
- Aussie dollar awaits Chinese CPI and PMI data
Will the CPI data interrupt the idea of ‘rising for longer’?
The US dollar was able to stabilize this week, recovering a small portion of its losses following the release of CPI data showing that US inflation resumed its downward trend in April.
This may have also given the dollar a chance to recover, thanks to comments from Federal Reserve officials signaling that, despite the slowdown in CPI inflation, they are sticking to their hawkish line for longer.
This again prompted investors to trim their bets on rate cuts to less than two quarter-point reductions. Specifically, only cuts totaling 36 basis points are estimated for the remainder of the year, and the chance of a September cut is currently around 60%.
Against this backdrop, this week traders with the US dollar in mind will turn their attention to April’s core PCE price index, the Federal Reserve’s preferred inflation gauge, which goes along with the month’s personal income and spending numbers.
After remaining unchanged at 2.8% y/y for March, the core PCE index could be about to cool down a bit, something that will be supported by the easing of the core CPI index. Additionally, the slowdown in average hourly wages together with stagnating retail sales indicates that income and spending growth may also have eased.
Consequently, a lower PCE index, as well as income and spending data indicating that inflation may continue to cool in the coming months, could cause investors to put back on the table some of their rate cut bets that have been suppressed in the past. This could weigh on the US dollar, although for the slide to be noticeable, Fed officials may have to soften their speeches as well.
Next week will be the last week for policymakers to share their views, as 1 June marks the start of the suspension period ahead of the next meeting, so their comments are likely to be highly consequential for markets.
Eurozone inflation data is likely to consolidate the June rate cut
With UK inflation higher than estimated and implied Bank of England rates rising, the European Central Bank is now the only major central bank expected to make a rate cut in June, with investors pricing in a 90% chance of a rate cut.
Even with data pointing to an improvement in activity on the European continent, investors did not let up, as ECB policymakers themselves have not stopped promoting the idea of a June cut. Particularly on Wednesday last week, President Lagarde pointed out that it is possible, as inflation seems to be fully under control.
Therefore, it is possible that the preliminary May CPI figures due next Friday, May 31st, will be of great help to those trading the Euro. According to the latest PMI series, the pace of price inflation eased in May and was the weakest on record since last November, indicating that downside risks exist.
Lower inflation rates are likely to help seal the deal for a June cut and possibly help investors to add further basis points of reductions beyond June.
Also, just days before the release of Germany’s CPI, Euro traders may get stronger clues about how inflation in the area moved in May. Consequently, the euro may drift.
More inflation figures from Japan and Australia
In Japan, the economic contraction shown in the first quarter, coupled with a slowdown in April’s inflation, raises doubts about whether the Bank of Japan should proceed with another rate hike by summer. However, investors are pricing in an above 80% chance of another 10 basis point hike by July.
On Friday 31st May, Tokyo’s CPI figures for May will be released, as well as information related to industrial production and retail sales for April. If this data indicates that inflation continues to fall and that one of the largest economies continues to struggle at the start of the second quarter, the odds of the Bank of Japan raising summer interest rates may diminish and the yen may continue to fall as a result.
On Wednesday 29th May, Australia will release its monthly CPI. At its meeting this month, the Reserve Bank of Australia left its stance unchanged, disappointing those who expected a bullish turn as inflation turned out to be more present than previously thought.
However, investors are estimating nearly a 10% chance of a rate hike by the Aussie central bank in September, with only 7 basis points of tapering expected between now and the end of the year. With April CPI data showing that inflation remained strong, the Aussie dollar could extend its most recent rally as traders rule out a rate hike and dismiss previously missed rate cut bets.
Chinese PMI indices and Canadian GDP are also on the agenda for the week
The Aussie dollar is also likely to be influenced by Chinese PMIs for May, due for release on Friday, May 31. April PMIs showed a slowdown in both manufacturing and services consumption, but exports and imports rebounded after the March slowdown, suggesting an improvement in domestic demand. The previous week’s data confirmed the mixed picture, with a stronger than expected acceleration in industrial production in April and an unexpected slowdown in retail sales.
May’s PMIs will therefore be important, as they could tip the balance. If they indicate weakness in the economy’s activity, investors may start to increase their bets on the reliance on more aid packages from the Chinese authorities, despite Beijing’s announcement a few days ago of some of its most aggressive measures to revive the ailing property sector. This situation could cause setbacks for the Aussie as well as the Kiwi.
Finally, in Canada, following a stronger than expected slowdown in most core inflation indicators in April, there is a 60% chance that the Bank of Canada will make its first rate cut of 25 basis points in June, with expectations continuing into July. Therefore, weak GDP figures on Friday, May 29, would convince more investors to support a June rate cut, increasing pressure on the Canadian dollar.
