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Week Ahead: Volatile Follow Through after Central Bank Decisions

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Fundamental analysis of Forex market

Last week was dominated by volatility as the RBA, Fed and the BOE all gave the markets something more to think about. The RBA hiked rates by more than expected, the Fed took the idea of a 75bps hike off the table, and the BOE said not to look for too many rate hikes, while increasing inflation forecasts and calling for a possible economic contraction in Q4.  Will the volatility continue this week?  In addition, the main economic data this week will be US CPI.  Traders, as well as the Fed, will be watching to see if recent lockdowns in China and the Russia/Ukraine war continued to cause supply chain issues during April.   Also, as earnings season winds down, there will still be a few big names to be on the lookout for, such as RBLX, COIN, PTON, and DIS.

RBA

The RBA surprised markets by hiking interest rates for the first time since 2010 by 25bps from 0.1% to 0.35%.  Markets were only expecting an increase of 15bps.  In addition, the Committee suggested there were more hikes ahead as inflation had picked up more quickly than anticipated. There was also evidence of increasing wages.  AUD/USD initially popped on the news, however, was quickly sold into as fears of a slowdown in China due the lockdowns from the coronavirus dominated the Aussie.  Will the downtrend in AUD/USD continue this week?

FOMC

The FOMC increased rates by 50bps, as expected, from 0.50% to 1.00%. This was the 1st time the Fed has raised rates by 50bps since 2000! In addition, the central bank noted that there are more rate hikes to come and that 50bps rate hikes are on the table at the next 2 meetings.   In the Fed’s eyes, this is due to the surprise of upside inflation.  They noted that further surprises could be in store. The Fed also said it will begin reducing its balance sheet on June 1st, quickly ramping up to a pace of $95 billion worth of bond sales per month.

At the press conference that followed, Fed Chairman Powell said that a 75bps rate hike isn’t something that the FOMC is actively considering.  As a result of this statement, risk turned positive as stocks went bid while the US Dollar sold off.  Major US stock indices closed up over 3% on Wednesday!  However, markets took advantage of the move and on Thursday, took back all of Wednesday’s gains and then some.  The NASDAQ 100 lost 5%!  Will this extreme volatility continue?  Watch Fed speakers this week for comments about the next round of rate hikes and for clarity on Powell’s comments.

BOE

The Bank of England hiked rates by 25bps, bringing rates from 0.75% to 1.00%, as expected.   The vote to hike rates was 6-3, as 3 members were looking for a hike of 50bps.  However, what surprised the markets was the updated forecasts.  Members said they see inflation peaking at 10% and a possible economic contraction in Q4.  In addition, 2 members said they don’t see a need for further rate hikes.  During the press conference, BOE Governor Bailey went as far as to say that he doesn’t agree with people who think the BOE should be raising interest rates a lot more.  As a result of the dovish hike, the Great British Pound got hammered. GBP/USD sold off 200 pips immediately.  Will the Pound weakness continue this week? The UK releases Q1 GDP and March Industrial Production.  Perhaps better data could give GBP a much-needed boost.

Earnings

Earnings season begins to wind down with a handful of noteworthy companies releasing earnings this week.Some of the major releases are as follows:

AMC, NVAX, PLTR, COIN, LI, PTON, DIS, JD, RIVN, RBLX, BT, AFRM

Economic data

The most important piece of economic data to be released this week is US April CPI.  Expectations are for the headline print to pullback from 8.5% to 8.1%.  The core inflation rate is expected to fall from 6.5% to 6%.  However, note that the Fed targets 2% inflation!  Other noteworthy economic data releases are the German ZEW and inflation readings from China and Germany.  Some of the more important economic data is as follows:

Monday

  • Japan: BOJ Monetary Policy Meeting Minutes
  • Japan: Services PMI Final (APR)
  • China: Trade Balance (APR)
  • Mexico: CPI (APR)

Tuesday

  • Australia: NAB Business Confidence (APR)
  • Australia: Retail Sales Final (MAR)
  • Germany: ZEW Economic Sentiment Index (MAY)

Wednesday

  • Australia: Westpac Consumer Confidence Index (MAY)
  • China: CPI (APR)
  • China: PPI (APR)
  • Germany: CPI Final (APR)
  • US: CPI (APR)
  • Crude Inventories

Thursday

  • New Zealand: Food Inflation (APR)
  • Japan: BoJ Summary of Opinions
  • Australia: Building Permits Final (MAR)
  • UK: GDP Growth Rate Prel (Q1)
  • UK: Industrial Production (MAR)
  • UK: Manufacturing Production (MAR)
  • UK: Trade Balance (MAR)
  • US: PPI (APR)
  • Mexico: Interest Rate Decision

Friday

  • New Zealand: Business NZ PMI (APR)
  • Australia: New Home Sales (APR)
  • EU: Industrial Production (MAR)
  • US: Trade Balance (APR)
  • US: Michigan Consumer Sentiment Prel (MAY)

Chart of the Week: Weekly GBP/USD

Source: Tradingview, Stone X

GBP/USD put in a high at 1.4250 during May 2021 and has been moving lower since.  However, the move picked up steam once the pair fell though the 1.3000 level just a few weeks ago.  In just 3 weeks, GBP/USD has moved from the 200 Week Moving Average near 1.3100 down to Friday’s low at 1.2275, a move of nearly 825 pips!  Will the selloff continue this week?  Horizontal support sits just below the lows at 1.2251, which is a prior low from the week of June 29th, 2020, then 1.2075, which is a prior low from the week of May 18th, 2020.  Below there, price can fall all the way to the pandemic lows at 1.1410.  However, notice that the RSI is in oversold territory, an indication that GBP/USD may be ready to move higher.  First resistance is at the week’s high, way up at 1.2638. If we assume the low is in, we can draw Fibonacci retracement levels from the highs of the week of March 28th to last week’s lows.  The next resistance is at the 38.2% Fibonacci retracement level near 1.2666 then the 50% retracement level near 1.2787.

Last week was dominated by central bank meetings.  This week will be dominated by follow through price action from those central bank meetings.  Will Fed members talk this week about a 75bps rate hike?  Will the US CPI come in lower than March’s print?  Will UK data be weaker than expected? Watch headlines this week, which may determine where prices will be headed next.

Have a great weekend!