Home ForexForecasts Week ahead: ECB decision and US payrolls will steal the show

Week ahead: ECB decision and US payrolls will steal the show

by SuperiorInvest
  • Nonfarm Payrolls and Powell Testimony Will Be Crucial for the US Dollar
  • European Central Bank could lay the groundwork for summer rate cuts
  • The Bank of Canada decision and the UK budget announcement are also the focus

The dollar prepares for US payrolls

Riding a wave of American economic resilience, the dollar is currently the best-performing major currency this year, having gained almost 3% against a basket of currencies in a couple of months.

This stellar performance reflects an impressive American economy. Economic growth is advancing at a solid pace, the labor market remains historically tight and inflation is not cooling as quickly as investors expected.

With the economy still surging, traders have been forced to unwind bets on imminent rate cuts by the Federal Reserve. Markets are currently pricing in just three rate cuts this year, down from six cuts a few months ago. Therefore, investors expect US interest rates to remain at higher levels for a while longer.

The gloomy economic outlook in the rest of the world has also benefited the dollar.
The United Kingdom and Japan have fallen into technical recessions, the eurozone is plagued by stagnant growth and China is still dealing with the fallout in its real estate sector. As such, alternatives to the dollar are not very attractive at the moment.

Next week's events will help shape this narrative. The ball will start rolling on Tuesday with the release of the February ISM services index, ahead of Wednesday's ADP private employment data.

Meanwhile, Federal Reserve Chair Powell will appear before Congress on both Wednesday and Thursday for his semiannual testimony. Investors typically focus on the question-and-answer session with lawmakers, where the head of the Federal Reserve will be grilled about the economic outlook.

Of course, the main event will come on Friday, when the latest US jobs report hits the markets. Economists expect another round of strong employment numbers, which would reaffirm that the labor market remains in good shape. Some early indicators pointed to a slowdown in job growth in February, but nothing dramatic.

Has the ECB been left behind?

In the eurozone, the central bank is widely expected to keep rates steady on Thursday, so the focus will mainly be on updated economic projections and any signals from President Lagarde on the timing of rate cuts.

The euro zone economy hit a wall last year when high interest rates began to hit demand and governments cut spending. Germany has been especially hard hit, as a slowdown in global trade has crippled its export-based business model.

Reflecting this economic slowdown, inflation has lost steam and fell to an annual rate of just 2.6% in February. Wage growth has also begun to slow down, although it remains at high levels.

Despite this loss of momentum, ECB officials have stressed that it is still too early to cut rates, as doing so prematurely could fuel a second round of inflation. Most officials have pointed to June as the most likely month for a rate cut, which would give them access to updated pay figures.

This meeting will likely be used as a “springboard” into June as the central bank reaffirms that it will be patient with rates until it is confident that inflation has been crushed.

Normally, this would be a positive message for the euro. However, this time may be different. The eurozone economy is already on the brink of a recession and the longer the ECB waits to cut rates, the more painful the slowdown could be. In turn, that could force the central bank to make even deeper cuts in the future.

The ECB is very focused on wage growth, which is unfortunately one of the most lagging economic indicators. Waiting too long to act could inflict unnecessary damage on the economy and lead to a situation where rates are ultimately cut by brute force. That paints a gloomy picture for the euro, even if the ECB preaches patience next week.

Decision on UK budget and Canada rates coming soon

Crossing into the UK, the government will release its latest budget on Wednesday. The Chancellor has made it clear that he wants to cut taxes on workers, in a last-ditch attempt to win back voters before a general election that will almost certainly be a disaster for the ruling party.

In markets, action will depend on which taxes are cut and by how deep. Significant cuts to income tax or national insurance could mean good news for the pound, as that would fuel spending and inflation, adding pressure on the Bank of England to keep rates high for longer. That said, there isn't much room for drastic tax changes, so any reaction could be relatively small.

In Canada, the central bank will conclude its meeting on Wednesday. Markets are pricing in a 15% chance of an immediate rate cut, but that is highly unlikely considering the economy is still in good shape. The housing market in particular is extremely active, driven by record levels of migration.

That said, it is only a matter of time until the Bank of Canada makes cuts, as inflation has slowed dramatically. Markets are pricing in the first rate cut over the summer. Therefore, this meeting may bring a gentle change of tone, whereby the Bank lays the groundwork for such a move. The country's employment data will be published on Friday.

Finally, some data releases from Japan, China and Australia could attract attention. Starting Tuesday, the latest inflation statistics from Tokyo will give investors an idea of ​​whether the Bank of Japan will raise rates this year. Australia's GDP data for the fourth quarter will be released on the same day, along with China's services PMI for February.

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