May Week 2, Looking Back and Looking Forward

May Week 2, Looking Back and Looking Forward

Looking back to the last week:

US inflation was softer than expected, but core CPI met elevated expectations. Signs indicate that services with less energy CPI may have peaked, which should please the Fed. Fed members pushed back on rate cuts and suggested the possibility of hiking if necessary. ECB member Kazimir thinks rates may need to be raised longer than expected. SNB president Jordan reiterated hawkish comments. BOJ Governor Ueda mentioned the possibility of cancelling YCC and shrinking the balance sheet. China's consumer prices rose minimally, and PPI fell significantly, raising concerns about the GDP targets and calling for more stimulus. China's loan growth dropped sharply, despite government efforts to boost demand. BOE delivered a hawkish hike, and the USD gained strength. US debt ceiling talks stalled. Bloomberg revealed RBA's rate research with various scenarios.

Looking forward to the next week:

The upcoming week is expected to be characterized by ongoing discussions between Democrats and Republicans on the debt ceiling, which will likely remain at a stalemate. The failure to resolve this issue can potentially cause severe consequences for both the United States and the global economy. However, it is unlikely that either side will yield until the last possible moment. Traders will also have a plethora of economic data to analyze. Australian dollar (AUD) traders will closely monitor wage and employment data, as well as the release of RBA minutes. European (EUR) traders can anticipate the publication of quarterly employment and growth data, along with the monthly ZE sentiment report. Meanwhile, Japanese yen (JPY) traders will focus on CPI, GDP, trade data, and more. Additionally, it is essential not to overlook the significance of US retail sales, industrial production, and regional business sentiment reports.

The week ahead (key events and themes):

  • Turkey’s election
  • US debt ceiling talks
  • China data dump
  • US retail sales
  • Eurozone GDP, employment, inflation and ZEW sentiment
  • RBA minutes, Australian wage data and employment report
  • Japan CPI
Turkish Election Results Awaited Amid Inflation Concerns

The preliminary results for the Turkish election are set to be announced on Sunday, determining whether President Erdogan will continue his two-decade-long rule or face a potential ousting. Given the persistently high inflation, currently above 40% and peaking at 85% in 2022, it is evident that many citizens desire a change. The outcome remains uncertain, leaving observers eager to see if the call for transformation will be answered. Forex traders dealing with the Turkish lira (TRY) should be cautious about the potential gap risks at the market opening on Monday and manage their risk accordingly.

Deadlock in US Debt Ceiling Talks Raises Uncertainty

The ongoing discussions to raise the US debt ceiling have hit an unsurprising roadblock, with both Democrats and Republicans failing to make any substantial progress. As the clock ticks down, both sides continue their attempts to gain leverage over their opponents, and this deadlock may persist until the final moments. This political impasse is likely to extend for several weeks, leading to increased uncertainty and a decline in risk appetite among investors. Until a resolution is found, this unresolved issue is expected to limit the upside potential for market sentiment.

US Retail Sales and Forex: Impact on Consumption

With certain indicators signalling cracks in US employment figures, investor attention is shifting toward consumer trends. Alarming signs of weakness have emerged in retail spending, with the annual growth rate plummeting to a post-pandemic 34-month low of 2.34% and showing contraction for the past two months. Should retail sales further deteriorate, combined with disappointing indicators like industrial production, forex traders might anticipate the possibility of "higher for less" scenarios or even earlier interest rate cuts. Such developments could weigh on the US dollar and shape market expectations.

GDP, Employment, Inflation, and ZEW Sentiment in Focus

Eurozone employment has reached record highs in the fourth quarter, leading to inflationary pressures. On Tuesday, Q1 data will be released, including flash GDP figures, followed by final HICP data on Wednesday. Overall, European Central Bank (ECB) members maintain a hawkish stance, and robust economic data will keep them on track for further interest rate hikes. However, the forward-looking ZEW report, expected on Tuesday, carries significant weight, particularly after April's unexpected decline in business expectations. If the ZEW sentiment improves alongside strong employment data, some ECB members might advocate for a "higher for longer" approach to monetary policy.

Keeping a Close Eye on China's Economic Indicators

Recent data from China has revealed a contraction in the PMI, disappointing import and export figures, sluggish inflation, deflating factory-gate prices, and a sharp decline in loan demand. The country's reopening has not been as strong as initially anticipated, potentially leading to further disappointments regarding global growth prospects. Investors will closely monitor China's data dump this week, which includes industrial production, retail sales, investment, and employment data. The outcomes of these indicators may have significant implications for forex markets and investor sentiment worldwide.

RBA Minutes, Australian Wage Data, and Employment Report: Forex Impact

The RBA's minutes, Australian wage data, and employment report will impact Forex. The RBA's rate hike decision will be clarified in the minutes. Rising wages and a strong employment report may signal a June hike, boosting the Australian dollar and affecting the ASX index. Forex traders closely watch these releases.

Japan CPI and Key Data Points for Yen Traders

Ueda's remarks suggest that if Japan achieves its inflation target in a stable and sustainable manner, yield curve control (YCC) may be cancelled, and the balance sheet could be reduced. However, higher levels of inflation delay the realization of this goal. Furthermore, as Tokyo's Consumer Price Index (CPI) increases, there is a strong possibility that Japan's nationwide CPI will also rise.

Yen traders should pay close attention to key data points such as corporate goods prices (PPI), GDP, industrial production, trade data, and CPI this week. These indicators will have a significant impact on the yen's value in the forex market.

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