This week has the potential to be volatile with the RBA and ECB meetings, as well as the US CPI reading for May.

Last week, the Bank of Canada raised rates by 50 basis points and said there was more to come. This week, the RBA and the ECB will have their respective turn to decide what to do with monetary policy. The RBA is expected to raise interest rates by 25 basis points and signal that further rate hikes are likely. The ECB is expected to leave rates unchanged at -0.50, while signaling the end of QE and a hike at the July meeting. In addition, nonfarm payrolls in the United States exceeded expectations last week, indicating that the labor market is tight. And given the heightened scrutiny of inflation data, traders will be watching the results of the CPI printouts from China and the US closely. Will the US CPI follow last month’s decline and show that inflation is stabilizing?

BDC

The Bank of Canada raised interest rates by 50 basis points last week, from 1.0% to 1.5%, as expected, and issued a clearly hawkish statement. The central bank’s main concern was inflation, particularly in the energy and food sectors. April inflation was 6.8% year-on-year and the BOC noted that it expects inflation to “rise in the near term before easing off”. Consequently, the Board of Governors estimated that interest rates will have to rise further. Furthermore, the BOC noted that members are ready to “act more forcefully” if needed to achieve the 2% inflation target. This week, markets will see how the labor market holds up as the Canadian employment change for May is released. An additional 11,000 jobs are expected to have been added to the economy in May, compared to +15,300 in April.

RBA

The Reserve Bank of Australia meets on Tuesday this week and the central bank is expected to raise rates by 25 basis points, from 0.35% to 0.60%. However, some are calling on the RBA to raise rates by as much as 40 basis points, to 0.75%. Could Governor Lowe surprise the markets again? At the last meeting, markets expected the RBA to hike rates by only 15 basis points. However, the central bank raised rates by 25 basis points. Minutes from the May meeting noted that the board discussed three options, one of which was to raise rates by 40 basis points! Since the last meeting, the wage price index for the first quarter has been published. The results for the first quarter reading were 2.4% YoY versus 2.3% YoY in Q4 2022 and 2.5% YoY expected. So wages aren’t exactly spiraling out of control. But given the recent RBA minutes from May, consider that the central bank could raise rates more than the expected 25 basis points!

ECB

The European Central Bank is meeting on Thursday this week and the central bank is expected to officially announce the end of its quantitative easing program and set the stage for the ECB to raise rates at the July meeting. Last week, the Eurozone released its Flash CPI for May at 8.1% YoY versus 7.4% YoY in April. Expectations were 7.7% year-over-year. This was a record high for the inflation reading. However, there will be no interest rate hikes at this meeting as Christine Lagarde has previously said the ECB will only raise rates a few weeks after QE ends. However, ECB hawks were out in force, with some discussing the idea of ​​the central bank increasing increases by 50 basis points at the July meeting. This would take interest rates from -0.5% to 0.0%! Watch for clues at this week’s meeting for future rate hikes!

Economic data

Last week, the economic highlights of the week were the Eurozone CPI and the US Nonfarm Payrolls. We have already discussed the Eurozone CPI data above. The US non-farm payrolls print was +390K versus an expectation of +325K and an April print of +436K. The unemployment rate and average hourly earnings were unchanged from to April, with readings of 3.6% and 0.3% MoM, respectively. This week the focus will be on US CPI data. The May print is expected to remain unchanged at 8.3% YoY and the Core print to have risen “only” 5.9% YoY from 6.2% YoY. a year in April. If the data comes out as expected, inflation will start to show signs of plateauing (at a very high rate). This, combined with strong NFP data, could encourage the Fed to raise rates at a faster pace to bring down inflation. The next FOMC meeting is June 15.^e. In addition to the US CPI, Germany will release its Factory Orders, China will release the CPI and PPI, and Canada will release its Employment Change in May. Other important economic data are as follows:

Monday

• China: Caixin Services PMI (MAY)Tuesday
• Australia: Final Building Permits (APR)
• Australia: RBA decision on interest rates
• Germany: Factory Orders (APR)
• United Kingdom: PMI Final Services (MAI)
• Canada: Balance of Trade (APR)
• United States: Balance of Trade (APR)
• Canada: Ivey PMI sa (MAY)

Wednesday

• Japan: Final GDP growth rate (Q1)
• Australia: NAB Business Confidence (MAI)
• Australia: RBA Map Pack
• Germany: Industrial Production (APR)
• UK: Halifax House Price Index (MAI)
• EU: GDP growth rate 3^rd East (Q1)
• EU: evolution of final employment (Q1)
• Crude inventories

Thursday

• China: trade balance (MAY)
• Mexico: Inflation rate (MAY)
• EU: ECB decision on interest rates
• Canada: Speech by BOC Governor Macklem

Friday

• China: CPI (MAY)
• China: PPI (MAY)
• Canada: job change (MAY)
• United States: CPI (May)
• United States: Michigan Consumer Sentiment Prel (JUN)

Chart of the week: EUR/JPY daily

Source: Tradingview, Pierre X

Yen pairs in general have risen over the past week. However, EUR/JPY outperformed most other yen pairs. On Friday, the pair hit its highest level since June 2015, hitting the most recent high of 140.00 on April 21st.^st. The first level of resistance is at the June 2015 highs at 141.06 and then the 127.2% Fibonacci extension from the April 21 highs.^st at the lows of May 12^e at 142.00. Above there, the next level of resistance is not until the 161.8% Fibonacci extension from the same time frame near 144.54. First support is at the recent previous high and psychological support level at 140.00. Below, the horizontal support crosses at 136.80 and then the 50-day moving average at 136.48. The next level of support is the May 12 low^e at 132.65.

This week has the potential to be volatile with the RBA and ECB meetings, as well as the US CPI reading for May. Watch for comments from central banks regarding plans for future rate hikes, as well as revisions to growth and inflation forecasts. Also, as the Fed enters the blackout period for Fed members, consider that they may have a continued hawkish approach to monetary policy, especially if the CPI reading is stronger than expected on Friday. !

Have a good week-end!