Week Ahead – ECB on Deck as Stimulus Debate Heats Up

Fundamental analysis of Forex market

Financial markets want to know if the Fed is committed to a sustained inflation overshoot. The bond market flattener trade suggests many market participants think we have seen the peak in yields. Inflationary pressures are showing no signs of easing just yet and the market will soon look to test the Fed’s patience. The dollar has been stuck in a tight trading range since the middle of June but that could soon change if the rest of the world shifts to a tightening mode more quickly than the Fed.

The upcoming week is filled with many catalysts that stem from a deadline to finalize a bipartisan infrastructure package, persistent global delta variant concerns, widespread inflationary pressures, central bank rate decisions, and a busy week of earnings results. The main event will be the ECB rate decision and press conference. This will be the first meeting since their strategy review that aimed for a slightly higher inflation target. It appears that a divide is growing in the ECB over stimulus guidance, a sign that the hawks will be strongly push for tightening in the fall.

All eyes will be on England after UK PM Johnson has decided to move forward in lifting most pandemic restrictions on July 19th. The UK has had one of the best COVID-19 vaccination campaigns in the world, with more than 46 million people having received at least one dose of coronavirus vaccine. BOE’s Saunders noted that withdrawing stimulus measures may be appropriate soon. Deputy Governor Ramsden stated “envisage those conditions for considering tightening being met somewhat sooner than I had previously thought.” Currency traders will pay close attention to BOE’s Haskel on Monday to see if the bank is quickly shifting to taper mode.



Wall Street had a very choppy trading week after a mixed start to earnings season, a dovish semi-annual monetary policy testimony from Fed Chair Powell, and fading confidence from the US consumer.  When the dust settled the dollar was stronger, Treasury yields were lower, but confidence in risky assets started to wane.  The second week of earnings will provide a broader look into several sectors of the economy, which might support the argument that inflation is looking more persistent.

Wall Street will closely follow every development with the bipartisan infrastructure proposal on Capitol Hill.  Senate Majority Leader Schumer will try to deliver on his ambitious timeline to get this bill passed.   A key procedural step should occur on Monday and that could set up an initial vote on Wednesday for the $579 billion infrastructure deal.

With the Fed entering the blackout period ahead of the July 29th FOMC policy decision, it is a busy week of economic data, but nothing like the past one. On Monday, the NAHB housing market index is expected to tick higher to 82, still well off the highs seen at the end of last year.  On Tuesday, both Building Permits and Housing Starts should post modest gains, a sign the housing market isn’t ready to cool.  Thursday is all about weekly initial jobless claims and if the rate of decline can speed up.  Friday is all about the flash PMI readings which should show steady activity in both the manufacturing and service sectors.


The ECB holds its monetary policy meeting on Thursday, and the central bank is widely expected to implement significant changes in monetary policy. The July meeting was expected to be a non-event, but the release of the ECB’s strategy review last week has the markets buzzing since the Thursday meeting should provide more clarity on how the bank plans to implement this new strategy.

At the presentation of the strategy review, ECB President Christine Lagarde said that there would be a review of forward guidance to align it to the strategy review. This means that we could see some important changes in forward guidance at the meeting.

The strategy review has changed the inflation target from “below, but close to 2%”, to “2%”, and also stated that the bank is willing to accept “a transitory period in which inflation is moderately above target.” The ECB is likely to incorporate these changes in its forward guidance.

The ECB is unlikely to increase the size of bond purchases through the Pandemic Emergency Purchase Programme at this meeting but may indicate that these purchases will be increased in September.

On Friday, Germany releases July PMI reports. Manufacturing PMI is forecast to come in at 65.0, while the estimate for Services PMI stands at 60.0 points. Both of these estimates are indicative of strong growth.


On Monday, the government is scheduled to lift all Covid restrictions, with mask-wearing and social distancing optional but not mandatory. However, there is opposition from health officials who fear the move could lead to a surge in Covid infections. As well, the mayor of London has said that passengers on public transport will still be required to wear masks.

BoE member Jonathan Haskel will deliver a speech at the University of Liverpool School of Management, on the topic “Will the pandemic scar the economy?”

On Tuesday, U.K. Business Secretary Kwasi Kwarteng testifies before a parliamentary committee on how to protect the nation’s steel industry following the massive collapse of Greensill Capital.

The week finishes on a busy note. The consensus for UK Retail Sales for June is 0.4% MoM and 9.8% YoY. The July PMIs are projected to remain well into expansionary territory, with a forecast of 62.0 for Manufacturing PMI and 62.5 for Services PMI.

Emerging Markets


On Friday, the Bank of Russia holds a policy meeting. The central bank may tighten policy and raise interest rates by 75 basis points or more, with inflation running well above the bank’s target of 4.0%. In June, the bank raised rates from 5.0% to 5.5% 

South Africa

South Africa releases June CPI on Wednesday. The consensus stands at 4.8% YoY, down from 5.2% in May.

On Thursday, the South African Reserve Bank is expected to keep interest rates unchanged at 3.50%.

Asia Pacific


The afterglow from last Friday’s RRR cut has quickly faded. China data this past week appeared to show the economic recovery slowing. Washington DC is ramping up the anti-HK and Xinjiang and adding more China tech companies to the entity list. Additionally, China announced tighter supervision of property developer debt levels and continues broadening its China-tech clampdown.

Unsurprisingly, China equities are struggling to maintain gains in this environment with Covid-19 swirling around the rest of Asia adding to the gloom. The PBOC has moved to a weaker Yuan bias and slighter softer policy and that means that China’s one and three-year Loan Prime Rates will remain unchanged this week.

With no other data of note this week, China markets will be at the mercy of US-Sino rhetoric and China’s internal clampdowns on technology, property etc.


India’s COVID-19 cases were appearing to be on the right track but a recent increase in cases has many worried that a third wave could be coming.  Until COVID cases start trending lower, the Indian rupee still remains vulnerable to the dollar.  A pullback with oil prices has provided some modest support for the rupee.

No significant data this week, with India and ASEAN currencies to be dominated by their internal trajectories of the delta-variant Covid-19. The Rupee remains vulnerable to more US Dollar strength.

Australia & New Zealand

Australian stock markets are trading sideways despite another impressive set of jobs data this past week. The focus remains on the NSW Covid-19 outbreak and deepening restrictions in Sydney. Melbourne also entered a snap lockdown today as cases spread to Victoria and also South Australia. Markets remain on tenterhooks and extended closures in Sydney and Melbourne will surely see AUstralia recovery projections adjusted lower.

The RBNZ announced an end to bond buying this week, a surprise to markets. NZ inflation blew higher this week as well resulting in every NZ Bank pricing multiple rate hikes this year. That has lifted both the NZD/USD, and to a lesser extent AUD/USD. The New Zealand Dollar is set to perform strongly against both the US and Australian Dollars this week.

THE RBA Minutes will be ignored by local markets which will remain fixated on Covid-19 domestically, and this  will drive market movements downunder this week. Aust. Retail Sales and PMI will be of only passing interest.


Risk appetite for Japanese assets took a big hit after news that fans will be banned at the Summer Olympics.  Japan is clearly still in the middle of its fight against COVID and the decision to declare a state of emergency through August 22nd will dramatically force investors to downgrade their growth forecasts. The Bank of Japan downgraded GDP growth only slightly at its policy meeting today but Japan equities have given back all of their week’s gains as fears over a Covid slowdown intensify. Like the rest of Asia, Japan markets will be vulnerable to Covid-19 caseloads in the week ahead. USD/JPY remains a purely US/Japan rate differential play at the moment.

Japan has a short week ahead with Thursday and Friday both national holidays. WIth Covid-19 and the Olympics foremost, and with the BoJ policy meeting out of the way, Tuesday’s Inflation and Balance of Trade will not be market moving releases.



Covid-19 concerns are not easing up at the moment and that has been sending oil prices lower.  Even countries with successful vaccine campaigns are struggling with the Delta variant and that is proving disruptive to the short-term crude demand outlook.  The drama between the UAE and Saudi Arabia appears to be over and if OPEC+ can ratify that this week, more supply will be welcomed.

A big driver for oil prices will be Iranian output and that question won’t get answered until well after Iranian hardliner Raisi will be inaugurated president in early August.

If risk aversion becomes the dominant theme and the dollar rallies on safe-haven flows, WTI crude could start to see significant momentum selling.


Gold prices were having a tremendous July until the rally ran into a brick wall of technical resistance at around the $1,835 area.  Gold has been supported by the belief that many on Wall Street believe we saw the peak in rates and that has been good news for gold.  It seems we are seeing a long-term secular declining trend in rates as the US will have a high debt burden problem going forward and can’t afford to raise rates.  The longer-end of the Treasury curve will struggle to see the steepener trade return and that should be good news longer-term for gold.

The bullish move appears to have been exhausted post Fed Chair Powell’s testimony, which means prices could consolidate until the end of the month.   The Fed’s blackout period is beginning, so gold should remain confined by the $1800 and $1850 range.


Bitcoin continues to consolidate, trading consistently in the lower boundaries of the $30,000.00 and $40,000.00 trading range.  Bitcoin weakness from further China crackdown news or negative endorsements has yet to seriously threaten the $30,000 level as many traders still remain committed to their longer-term bets.

The upcoming week includes a key event on Wednesday, called “The B word”, which attempts to show how institutions can embrace Bitcoin.  Every crypto trader will definitely listen closely to hear any updates over Bitcoin mining clean energy initiatives.  Tesla CEO Elon Musk, Square Co-Founder Jack Dorsey, and ARK Invest CEO Cathy Wood will all speak.

Key Economic Events

Monday, July 19

  • PM Johnson lifts Covid restrictions in England
  • BOE policy maker Haskel speaks at the University of Liverpool School of Management on “Will the pandemic scar the economy?”

Economic Data/Events:

  • UK Rightmove house prices
  • Turkey consumer confidence
  • Poland employment, average gross wages

Tuesday, July 20

  • US Secretary of Transportation Buttigieg speaks at the Economic Club of Washington D.C.
  • UK Business Secretary Kwarteng speaks to Parliament committee on how to protect the nation’s steel industry

Economic Data/Events:

  • US housing starts, building permits
  • Netflix Earnings
  • Eurozone Current Account Balance
  • Italy Current account balance
  • Australia RBA meeting minutes
  • China loan prime rates
  • Japan CPI
  • Switzerland trade, watch exports
  • South Africa leading indicator
  • Germany PPI
  • Czech Republic PPI
  • Poland PPI

Wednesday, July 21

  • Tesla CEO Elon Musk and Square Co-Founder/CEO Jack Dorsey will discuss Bitcoin at an event called “The B Word.”

Economic Data/Events:

  • Australia Retail Sales
  • Poland Retail Sales
  • Italy industrial Sales
  • Japan trade
  • UK public sector net borrowing
  • South Africa CPI
  • EIA Crude Oil Inventory Report

Thursday, July 22

Economic Data/Events:

  • ECB Rate decision: To commit in its forward guidance to keeping interest rates unchanged until inflation is forecast to reach or slightly surpass 2%.
  • US initial jobless claims, leading index, existing home sales
  • South Africa central bank (SARB) Rate Decision: to keep rates on hold
  • Eurozone Consumer confidence
  • France manufacturing confidence
  • Netherlands unemployment, consumer spending
  • Russia Industrial production, gold and forex reserves
  • Ireland PPI

Friday, July 23

  • ECB to decide on whether to lift the bank dividend cap.
  • Spain PM Sanchez speaks and to meet with technology CEOs.
  • The Tokyo Summer Olympics begin.

Economic Data/Events:

  • US July prelim Markit Manufacturing PMI: 62.1e v 62.1 prior
  • Germany July prelim Manufacturing PMI: 65.0e v 65.1 prior
  • Eurozone July prelim Manufacturing PMI: 62.1e v 63.4 prior
  • UK July prelim Manufacturing PMI: 62.0e v 63.9 prior, GfK consumer confidence, retail sales
  • Russia central bank (CBR) rate decision: Expected to raise interest rates 75 basis points to 6.25%
  • Singapore CPI, private home prices
  • Poland unemployment rate
  • Spain mortgage lending
  • Canada retail sales
  • ECB survey of professional forecasters

Sovereign Rating Updates:

  • Cyprus (Moody’s)
  • ESM (DBRS)