This week has proven again that fundamental news is not even close to moving the market when sentiment leads. Investors are turning toward the U.S. and the possibility of QE tapering off as early as this summer, and discouraging U.S. macro numbers were not enough to put the dollar's upward momentum down.
For the upcoming week, there's little first-line data to watch coming from the U.S. But, as usual, there will be no lack of market movers and central banks will take the lead.
AUD and RBA policy meeting minutes, May 21:
- Hawkish: AUD bullish
- Dovish: AUD bearish
- Key pairs to watch: AUD/USD, AUD/JPY
With the release of the minutes of the latest RBA decision to lower the cash rate by 25 basis points to 2.75%, market players will be looking for tips regarding the next movements. RBA Governor Glenn Stevens has declared that growth in Australia was "a bit below trend in the second half of 2012, and this appears to have continued into 2013." While despite employment has continued to grow, the labor force grew even more, increasing the unemployment rate.
With the AUD in a bearish trend, comments pointing toward further economic slowdown and possibilities of a rate cut will push market players to price in another rate cut, leading to more AUD slides. A more positive wording should favor an upward correction in AUD, although it may not be enough to change the trend.
JPY and BOJ monetary policy decision, May 22:
- Hawkish/no announcements: JPY bullish
- Dovish/Announcement of new measures: JPY bearish
- Key pairs to watch: USD/JPY, EUR/JPY, GBP/JPY
It will be hard for the BOJ to surprise markets this month. In early April, the central bank launched an aggressive campaign to fight deflation, announcing a set of policies that that exceeded market expectations. The BOJ will not only expand its balance sheet by purchasing longer-term debt and more exotic securities like ETFs, but will also merge its asset-purchase programs and suspended a rule that prohibited the purchase of longer-term debt.
A 2% inflation target remains the priority for PM Shinzo Abe, and the market will need a large dose of facilities plus a still negative growth outlook to take yen on a bearish run even further. A neutral stance coming from the central bank may favor some temporal yen gains that won't affect the dominant trend.
GBP and BOE minutes, May 22:
- Hawkish: GBP bullish
- Dovish: GBP bearish
- Key pairs to watch: GBP/USD, EUR/GBP, GBP/JPY
During the last meeting the BOE left its economic policy unchanged, refraining from taking action ahead of the governor swap. Mervin King will step down on June 30 and be replaced by Mark Carney, current Bank of Canada governor. However, the latest inflation report showed the country is somehow giving signs of growth, which suggests the minutes may offer more positive comments regarding the economic situation.
In that case, the market will be little surprised. Despite being bullish for the pound, most of it is already priced in and should lead to temporary rallies. A step back on comments toward a negative economic outlook will likely put GBP under selling pressure.
USD and Fed minutes, May 22:
- Maintaining QE: USD Bearish
- Tapering QE: USD Bullish
- Key pairs to watch: EUR/USD, USD/JPY, AUD/USD, GBP/USD
The minutes have been pretty irrelevant lately, as the wording has been maintained: Economic growth remains sluggish and will proceed at a moderate pace, while the unemployment rate will gradually decline toward levels consistent with the Fed's mandate. Furthermore, the latest economic decision has shown that policy will remain accommodative, which means rates will stay at record lows and the Fed will continue to buy $85 billion a month in Treasury and mortgage bonds -- at least until unemployment falls to 6.5%.
However, many of the voting members -- even the ones who opposed earlier this year -- had suggested it's time to start thinking about a possible end to QE. The market has been steadily pricing it in, buying the USD in advance. A change in wording, reinforcing the possibility of ending QE, will likely see the greenback extending its advance across the board. On the other hand, diminishing chances of an end to QE will likely see the currency suffering a strong setback.