The U.S. Central Bank Expected to Keep Rate Unchanged but Focus on Forecasts
Central banks will take the spotlight as the U.S. Federal Reserve, Bank of Japan (BOJ), Bank of England (BoE) and the Swiss National Bank (SNB) will publish monetary policy decisions. The market anticipates no changes across the board, but is expecting some of the rhetoric to fill the void of monetary policy actions. The next few weeks will be full of economic events and with uncertain outcomes volatility is forecasted to rise.
The June Federal Open Market Committee (FOMC) meeting will end with the release of the statement , economic projections on Wednesday, June 15 at 2:00 pm EDT. Chair Janet Yellen will deliver a prepared statement and address questions form the financial press. The U.S. central bank is not expected to deliver an interest rate hike this meeting. The short lived June rate hike got new life after the April FOMC minutes were published. April’s statement was not followed up with a press conference leaving the market with little guidance. The window for a rate hike is shrinking as employment might be losing steam after a disappointing U.S. non farm payrolls (NFP) report earlier this month.
The Bank of England (BoE) will be under the microscope one week ahead of Britain’s referendum on EU membership. The central bank staff has been accused of partisanship by Leave supporters as it has issued warnings on the negative effects of the Brexit. Last month Governor Mark Carney said that a Brexit vote could trigger a “technical recession”. The BoE will publish its monetary policy summary and the minutes from the meeting on Thursday, June 16 at 7:00 am EDT.
EUR/USD awaits June FOMC
The EUR/USD has lost 0.278 percent in the last 5 days. The pair is trading at 1.1297 and while ahead the EUR will go into next week full of uncertainty. The biggest factor in the short lived USD rally was the release of the April FOMC minutes that put the June interest rate hike back on the table. The mixed economic data and the weak NFP have now taken it off again. Fed Chair Janet Yellen’s speech on June 6 did little to keep the June rate hike alive.
Energy Prices Get Lower US Inventory Boost
Oil prices had a volatile week. West Texas crude gained 1.98 percent this week. Trading in a range between 51.37 and 47.93 the price of WTI will end near $50. U.S. crude oil inventories released by the Energy Information Administration (EIA) were inline with a drawdown of 3.2 million barrels. The previous week report showed a 4.2 million negative change in barrels held in inventory. The disruptions in Nigeria and Canada added to the appreciation of crude. There are signs that normal supply will resume in Canada soon, and with Organization of the Petroleum Exporting Countries (OPEC) members breaking record output levels, prices could be under pressure. Energy prices achieved stability this year as Russia and Saudi Arabia started feeling each other out with public statements about a possible oil output freeze. The agreement never materialized, but it put the brakes in the decline of crude prices as producers engaged in dialogue. Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS) have already reversed their forecast and now see oil rising as by their estimates the bottom has been reached.
Fed June Rate DOA But July and September Rising
The FOMC statement released on April 27 provided little clues on what the members of the Fed were thinking. The U.S. economy was seen improving, but after a rough start of the year the market had pared back the number of rate hikes to 1 to 2 this year. That meeting had no press conference so that is all investors had to go on until three weeks later the minutes from that meeting were published. The narrative suddenly changed from a noncommittal central bank with minor modifications to a statement, to a pro-active FOMC that was waiting for enough signals of economic recovery to launch another interest rate hike. The June rate hike went from a non-event to back on the table and sparked a USD rally. Mixed economic data and in particular the weaker than expected NFP that only added 38,000 jobs put probabilities back in single digits.
The CME FedWatch tools is showing a 4 percent probability of a change in interest rates on Wednesday, June 15. The July FOMC (no press conference) has 24 percent of a rate hike, September (press conference) 38 percent, November (no press conference) 41 percent and December (press conference) 60 percent. It will be interesting to see how the dot-plot released on Wednesday, June 15 matches against market expectations. Given the presidential race will be in full swing in September it could be less likely the Fed will act, leaving July (no press conference) and December (press conference) as the clear options.
BOE to Focus on Brexit as Survey Hints at Rate Hike Next Year
The Bank of England does not need to recluse from making comments on the economy during the Brexit referendum as they had to do during the general elections. That has left the Old Lady open for attacks as members of its staff have warned about the negative effects of a Exit vote. The main job of the central bank is to flag risks and right now there is no bigger risk than the upcoming referendum vote. The Bank of expected to hold the rate at record low 0.50 percent unchanged.
The GBP/USD lost 1.287 percent last week with the pair trading at 1.4344 after some polls have came out showing a Leave gaining an upper hand. The uncertainty of the Brexit vote outcome has hurt the GBP and could sway voters as the BoE has warned that a Leave win would hurt the currency in the short to medium term.
A familiar foe of the BoE spoke this week. George Soros the billionaire trader that made its name by betting against the central bank said that a Brexit would spell the end of the European Union. The investor is part of a trend of traders seeking a safe haven in assets such as gold as they await the results from the next couple of weeks on U.S. monetary policy and the Brexit referendum.
Market events to watch this week:
Tuesday, June 14
4:30am GBP CPI y/y
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
Wednesday, June 15
4:30am GBP Average Earnings Index 3m/y
4:30am GBP Claimant Count Change
8:30am CAD Manufacturing Sales m/m
8:30am USD PPI m/m0.3% 0.2%
10:30am USD Crude Oil Inventories
Tentative NZD GDT Price Index
2:00pm USD FOMC Economic Projections
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
2:30pm USD FOMC Press Conference
6:45pm NZD GDP q/q
7:55pm CAD BOC Gov Poloz Speaks
9:30pm AUD Employment Change
AUD Unemployment Rate
Tentative JPY Monetary Policy Statement
Thursday, June 16
Tentative JPY BOJ Press Conference
3:30am CHF Libor Rate
3:30am CHF SNB Monetary Policy Assessment
3:30am CHF SNB Press Conference
4:30am GBP Retail Sales m/m
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Monetary Policy Summary
7:00am GBP Official Bank Rate
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30amUSD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
Friday, June 17
8:30am CAD Core CPI m/m
8:30am USD Building Permits
11:00am EUR ECB President Draghi Speaks
*All times EDT