Week Ahead: Central Banks Galore with Fed in Focus

Weekly Recap

The main story this week was the confirmation from the ECB that a rate hike will be coming in July. The bank announced an end to its asset purchase program and cited the need for a quarter-point rise in July in the face of surging inflation. Along with the July rate-hike signal, the ECB also noted that a rate-hike of a “larger increment” would likely be appropriate in September if the inflation outlook persists. Despite the hawkish shift, EURUSD fell sharply in response to the news as traders focused on growth concerns and recession fears around the projected tightening. 

Risk assets including stock indices tumbled this week amidst the growing focus on central bank tightening. Despite the recent boost to sentiment owing to Shanghai re-emerging from lockdown at the start of the month, recession fears took hold over the week leading equities markets lower and weighing on risk-currencies and commodities. 

In FX, JPY began the week heavily under pressure amidst better risk appetite but ended the week higher as risk aversion took hold. EUR fell on ECB tightening while AUD was bolstered by a larger-than-expected RBA rate hike. The bank hiked by 50bps and signalled the need for further tightening near-term as it continues its fight against inflation. 

Oil prices reversed from initial highs as a stronger USD stole the focus from oil supply tightness. With global demand still pushing ahead and supply heavily impacted by the ongoing Russia-Ukraine conflict and subsequent sanctions on Russia, prices look likely to remain supported over the medium-view. The latest data from China showed that imports rebounded in May in the first sign of demand picking up there. 

Coming Up This Week

FOMC Meeting

The June FOMC meeting will be the headline event of the week. While a further 50bps hike is priced in, recent debate around the potential for the Fed to pause rate hikes after next month, mean that traders will be closely scrutinising the forward guidance offered this week. 

The majority of Fed members appear to still be supportive of the aggressively hawkish outlook laid out last time around. However, we have started to hear murmurs from certain corners of the Fed regarding the possibility for a pause. If these conversations look to have gained further prominence, USD will likely be lower in the wake of the meeting. Should the official Fed statement and Powell in his presser brush these suggestions off, however, and stick to its previous hawkish guidance, USD should remain well supported near-term. 

BOE Meeting 

The BOE meeting this week will be another key focus point for markets. Following UK inflation soaring to record highs last month, expectations are primed for further tightening from the BOE. The BOE had previously pushed back against further tightening, warning of the impact on the economy. However, with consumer prices running wild, the market is expecting the BOE to take action at this point with risks that the bank is forced to take a more aggressive approach in line with what we have seen from other central banks.

BOJ Meeting

While the two other central bank meetings this week are steeped in tightening expectations, the BOJ meeting bucks the trend. The BOJ has been steadfast in its commitment to maintaining an easing presence in the market with governor Kuroda taking every opportunity to reaffirm this commitment. This month looks likely to be more of the same with the BOJ spelling out the need to maintain support for the economy. 

Forex Heat Map 

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Technical Analysis

Our favorite technical chart of the week – S&P 500

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The S&P 500 has been moving lower within a clear bearish channel following the reversal from last 2021/early 2022 highs. Price recently rebounded off the channel lows but failed to break higher on a retest of the 4180 level. With that level holding as resistance the market has since turned lower and the outlook now is vulnerable to further losses should price break through 3965, putting the focus on 3795 next. 

Economic Calendar

Plenty to keep an eye on in terms of data and events this week. The FOMC, BOE and BOJ meetings will be the main focus but make sure to scan the calendar below for the full schedule. 

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Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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