The Fed is stuck. If it raises rates aggressively it risks sending the US into a recession. If it doesn’t raise rates it risks inflation spiraling out of control. So, this dilemma continues to worry investors as earnings are carefully picked apart for signs of slowing growth and foreboding signs of a coming US recession. The FOMC minutes provide some relief as there was no mention of a 75 bps rate hike. However, the RBNZ acted tough on inflation this week and this could set a precedent for how the Fed may have to turn even more hawkish in order to contain inflation. The ECB is pivoting more hawkishly too as Christine Lagarde announced two coming interest rate hikes for this summer.
Other key events from the past week
- NZD: Interest rate decision, May 25: The RBNZ surprised markets by raising their OCR projections for September 2023 to nearly 4%. They hiked by 50 bps, as expected, to 2% on Wednesday & this sent the AUDNZD sharply lower.
- GBP: UK PMI’s sink, May 24: The UK PMI data showed a severe slowing in the UK’s economic growth for May. Furthermore, demand is expected to slow further which should help pull prices lower too. The EURGBP upside bias at the start of the week accelerated on this weak PMI print.
- EUR: Coming rate hikes? May 24? ECB’s Kazakhs says the ECB should not rule out a 50bps rate hike as Christine Lagarde signals a 25bps rate hike in both July & September. Has the EURUSD now reached a turning point now?
Key events for the coming week
- EUR: Eurozone inflation, May 31: Will inflation data next week affirm the ECB’s need to raise interest rates more quickly. A surge in inflation above 8.1% y/y next week will increase calls for a 50 bps rate hike in July. Will that lift the EURGBP?
- Seasonal trades: EURUSD surge? Will the EURUSD soar higher into June? Can a hawkish ECB lift the EURUSD higher?
- CAD: Interest rate, June 01: 50 bps rate hike. The Short Term Interest Rate markets (STIR) are currently pricing in a 100% chance of a 50 bps rate hike from the BoC next week. If the BoC doesn’t deliver 50bps then the CAD should weaken.