Home ForexForecasts Week ahead: ECB rate cut could be overshadowed by BoC surprise and NFP report

Week ahead: ECB rate cut could be overshadowed by BoC surprise and NFP report

by SuperiorInvest
  • ECB set to cut rates on Thursday and focus on forward guidance
  • But will the BoC take the lead when it meets on Wednesday?
  • US jobs report expected Friday as Fed adamant on cuts
  • OPEC+ could extend some production cuts until 2025

The ECB is set to cut rates, but what next?

The path of central banks to reduce borrowing costs has not been easy, but it seems that the European Central Bank will be among the first to reach the desired destination. The ECB will meet on Thursday to make its June policy decision and is expected to cut its three main interest rates by 25 basis points. This would take the deposit rate to 3.75%, widening the spread with the federal funds rate, which currently sits in a range of 5.25% to 5.50%.

The euro has been surprisingly resilient in the face of all the rate cut speculation, rallying even as the June move was increasingly accepted by markets. The improving economic outlook across the eurozone is likely behind the recent rally. However, stronger growth could make it harder for the ECB to cut rates too quickly, especially since inflationary pressures have not yet fully eased.

Therefore, the main debate for ECB policymakers at the June meeting will not be so much whether to go ahead with the much-hyped cut, but rather to what extent and how quickly to ease policy thereafter. Investors believe there will be at least one more 25 basis point cut after June, but moderate members of the Governing Council are likely to lean more towards three and perhaps even four cuts.

President Lagarde will have to perform a difficult balancing act and it is ultimately the tone of the press conference that markets will react to most. If Lagarde downplays the prospect of rapid rate cuts, the euro could jump above the $1.09 level.

Will the BoC take the plunge and cut rates?

In the midst of the complicated inflationary outlook in the United States, the ECB is not the only central bank that is in a much more advantageous position than the Federal Reserve. The Bank of Canada has also seen good progress in getting inflation much closer to its 2% target midpoint. Headline inflation fell to a three-year low of 2.7% in April and all three underlying CPI measures have been declining so far this year, falling below 3.0%.

With Canada's labor market having cooled slightly over the past year and economic growth somewhat sluggish, there is a strong case for lowering rates on Wednesday when the Bank meets. However, markets are only factoring in about 60% of a 25 basis point cut, and a July move is seen as a much closer deal.

The delay in the Fed's own rate cut plans is likely a factor in this, as the Bank of Canada will not want to deviate significantly from the Fed for fear of causing a sharp drop in the interest rate. However, the option to cut in June remains firmly on the table and if the BoC springs such a surprise, authorities will likely try to signal that this is not the start of an aggressive rate cut cycle.

The Canadian dollar is in danger of breaking out of its bullish channel against the greenback if the BoC cuts rates, while traders will also be keeping an eye on the May jobs numbers due out on Friday.

NFP and ISM PMIs will shed valuable insights

This year has been one setback after another for the Federal Reserve, as inflation has been hovering closer to 3.0% instead of the 2% target, which seems increasingly elusive. Federal Reserve officials remain confident that inflation will eventually resume its downward trajectory, but the tight labor market and strong consumer spending have made that difficult.

However, more recently there have been some signs that the labor market is cooling and consumers are becoming more cautious. Friday's nonfarm payrolls report will be crucial in setting expectations ahead of the June 12 FOMC meeting.

In April, the U.S. economy added 175,000 jobs, marking a marked slowdown from the previous month. But what is perhaps a more significant sign that the hiring spree is coming to an end is the fact that the unemployment rate has been slowly rising over the past year, reaching 3.9% in April, while the Wage growth has also moderated.

If this trend continues in the May report, investors are likely to have more hope that the Federal Reserve can cut rates at least once in 2024. One of the headaches for policymakers during this phase of “patience” of the policy cycle is that the data has been very varied and even contradictory.

There is a risk that economic releases ahead of the NFP numbers will further confuse markets. They include the ISM Manufacturing and Services PMIs, due out on Monday and Wednesday respectively, which will provide vital updates on business momentum as well as gauge price pressures.

Unless the data clears up some of the fog over the Fed's policy path, the US dollar is likely to continue trading sideways against a basket of currencies.

OPEC+ meets, busy week for

The decision by OPEC and non-OPEC countries on production levels will be received by markets on Monday, as the cartel is scheduled to hold online meetings on Sunday. Reports suggest the oil alliance will extend voluntary cuts of 2.2 million barrels per day until the second half of 2024, while pledges by all OPEC+ members to restrict production by 3.66 million bpd could extend until 2025.

Oil prices have been unimpressed by the rumours, but a deal extending cuts into next year would be positive for the outlook.

On the other hand, the Australian dollar will be awaiting the latest domestic GDP readings on Wednesday. Australia's economy has been steadily losing steam over recent quarters and GDP growth is expected to remain at a meager 0.2% quarter-on-quarter in the first quarter.

Chinese data will also be important for the Australian dollar next week. Caixin manufacturing and services PMIs will be released on Monday and Wednesday respectively, while on Friday investors will expect to see stronger export growth when May trade statistics are released.

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