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Week Ahead: Continued Central Bank Fallout; Powell Testimony

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Fundamental analysis of Forex market

If the PMI data this week comes out worse than expected or Powell seems to be leaning “less hawkish”, interest rate expectations may come down.

Activity this week should be based on the follow-through from central bank activity last week.  The FOMC lifted rates by 75bps, which wasn’t expected until the “leaked” WSJ article on Monday that suggested the Fed would raise by 75bps, not 50bps.  Much to everyone’s surprise, the SNB hiked rates from -0.75% to -0.25%.  Expectations were for unchanged.  The BOE hiked rates by 25bps, as expected, however noted that it will act forcefully if needed.  Finally, the BOJ did nothing, except reiterate their easing stance and capping of JGBs at 0.25%.  As a result, markets were volatile as traders feared that higher interest rates could lead to a recession.  In addition, this week Fed Chairman Powell will testify in front of the Senate Banking Committee.  Look for him to clarify comments from the FOMC statement or the press conference.

FOMC

The FOMC hiked rates by 75bps last week to bring rates to 1.75%. This was the largest interest rate increase since 1994!  Fed Chairman Powell noted that the Fed most likely would only have hiked 50bps if it hadn’t been for the 8.6% YoY CPI for May and the higher than expected Michigan Inflation Expectations.  The intention to raise rates by 75bps was leaked to the press on Monday.  Chairman Powell said that the Fed’s main concern is to lower inflation towards its 2% target while the labor market remains firm. In addition, he noted that a 75bps was not going to be the norm, however the July interest rate decision could be 50bps or 75bps.  The Committee also revised inflation and unemployment forecasts higher, while lowering growth targets.  The DXY traded to its highest level since November 2002 to 105.79, while the S&P 500 sold off nearly 6%. Watch for additional volatility this week!

SNB

To the surprise of almost everyone, the SNB hiked rates by 50bps to bring them from a record low of -0.75 to -0.25.  This was the first rate hike for the central bank in 15 years! The statement mentioned that the rate hike was aimed at preventing inflation from spreading more broadly to goods and services unaffected by the impact of the Russia/Ukraine War.  The SNB also increased its year end inflation expectations from 2.1% to 2.8%.  Note that the CPI reading for May was 2.9% YoY.  The Swiss franc rallied hard after the announcement as USD/CHF dropped by 300 pips on Wednesday’s session.  If price breaks 0.9545, a double top will be in place.  The target for the double top will be 0.9050.  Watch this week to see if USD/CHF breaks the neckline of the pattern and continues its way towards the target.

BOE

The Bank of England hiked rates by 25bps, as expected, despite raising the inflation forecast to 11% in October and 9% over the next few months.  You may be asking yourself why the BOE only hiked 25bps while the Fed is hiking 75bps.  The answer is that board members have been consistently worried about the effect that higher interest rates will have on household incomes.  Earlier in the week, GDP, Manufacturing Production, Industrial Production and the Claimant Count were all worse than expected.  Therefore, the BOE does indeed have something to worry about.  In addition, rather than expand by 0.1% this quarter, the BOE now sees GDP contracting by -0.3%.  However, the statement did note that the BOE will act forcefully if necessary.  On Friday, BOE’s Pill said that if price pressures are becoming embedded, it would be a trigger for more aggressive hikes.  GBP/USD sold off aggressively earlier last week, from 1.2315 down to 1.1933, only to bounce after the announcement and close the week near 1.2200.  Watch for continued volatility in the pair this week as the UK releases inflation data and Retail Sales for May!

BOJ

After the SNB hiked rates by 50bps while in negative territory, there was hope that the BOJ may do the same late last week.  As USD/CHF was falling 300 pips, USD/JPY was falling as well.  However, it was not meant to be and after the announcement, USD/JPY bounced and retraced all of Wednesday’s selloff.  The BOJ left rates unchanged at -0.1% and reiterated that it will continue to defend the cap on the 10-year JGB at 0.25%. In addition, the statement indicated that the impact on foreign exchange and the financial markets will be watched (more verbal intervention).  It also said that it will take additional easing steps as needed.  This is completely opposite of almost all other central banks. Therefore, the Bank of Japan doesn’t sound like it has any intention of raising rates anytime soon.   Watch Yen pairs to see if they continue to move higher this week on the back on interest rate differentials.

Powell

Fed Chairman Powell will testify in his semi-annual meeting with the Senate Banking Committee on Wednesday.  Listen for Powell to clarify any of his remarks during the press conference or in the FOMC statement.  If Powell is hawkish and delivers remarks that suggest that the FOMC may hike rates by 75bps at the July meeting, watch for stocks to continue to fall on recession worries.  However, if he is less hawkish  and sounds like the Committee may only hike 50bps, watch for the stocks to move higher.

Economic Data

Last week, we saw a lot of economic data released worse than expected.  This week is a bit quieter on the economic data front.  However, as mentioned earlier, the UK will release both inflation data and Retail Sales for May, Germany will release its ifo business climate, and the US will release its remaining May housing data, including existing home sales and new home sales.  In addition, traders will get their first look at Manufacturing and Services PMIs for June. Other major economic data releases this week are as follows:

Monday

  • New Zealand: NZ PSI (MAY)
  • Australia: RBA Governor Lowe Speech
  • China: Loan Prime Rate 1 year
  • China: Loan Prime Rate 5 year (JUN)
  • Germany: PPI (MAY)

Tuesday

  • Australia: RBA Governor Lowe Speech
  • Australia: RBA Meeting Minutes
  • Canada: Retail Sales (APR)
  • Canada: New Housing Price Index (MAY)
  • US: Existing Home Sales (MAY)

Wednesday

  • New Zealand: Westpac Consumer Confidence (Q2)
  • New Zealand: Trade Balance (MAY)
  • Japan: BOJ Monetary Policy Minutes
  • UK: Inflation data (MAY)
  • Canada: CPI (MAY)
  • EU: Consumer Confidence Flash (JUN)
  • US: Fed Chairman Powell Testimony
  • Crude Inventories

Thursday

  • Global: Manufacturing and Services Flash PMIs (JUN)
  • Mexico: Mid-month Inflation Rate (JUN)
  • Turkey: TCMB Interest Rate Decision
  • US: Current Account (Q1)
  • Kansas City Manufacturing Index (JUN)
  • Mexico: Interest Rate Decision
  • US: Fed Bank Stress Test Results

Friday

  • Japan: CPI (MAY)
  • UK: Retail Sales (MAY)
  • Germany: Ifo Business Climate (JUN)
  • Australia: RBA Governor Lowe Speech
  • Canada: Manufacturing Sales Prel (MAY)
  • US: New Home Sales (MAY)
  • US: Michigan Consumer Sentiment Final (JUN)

Chart of the Week: Daily WTI (USOIL)

Source: Tradingview, Stone X

After pushing higher earlier in the week to 123.66, WTI Crude Oil reversed course after OPEC said that demand may not be as high as expected in the 2nd half of 2022 due to the war in Ukraine and the coronavirus activity in China.  On Friday, USOIL closed down nearly 6.5%, off $7.50 on the day to close near $109.50.  This was the lowest level since May 20th.  The first level of support is the lows from  May 19th at 105.09. Below there, price can fall to the lows from May 11th at 98.23, then horizontal support and the 50% retracement level from the lows of December 2nd , 2021 to the highs of March 8th, near 95.94.  Resistance above is at Friday’s high near 118.94, then the highs from June 14th at 123.66.  If price moves above there, it can test the March 8th highs at 129.42.

The results of last week’s central bank meetings will continue to be the focus this week.  Central bank members seem to be very concerned about inflation (with Japan as the exception).  However, if the PMI data this week comes out worse than expected or Powell seems to be leaning “less hawkish”, interest rate expectations may come down.  Watch for continued central bank fallout this week!

Have a great weekend!