Week Ahead: ECB Forum & Inflation data in focus

Watch this space because financial markets could end the first half of 2023 with a bang!

Investors will be served another platter of top-tier reports from major economies and key risk events. However, the main focus may be the European Central Bank’s three-day forum in Portugal’s Sintra which kicks off on Monday.

Here is a list of key economic releases and events for the coming week:

Sunday, June 25

• USD: New York Fed President John Williams speech in Switzerland

Monday, June 26

• ECB forum in Sintra, Portugal
• EUR: Germany IFO business climate

Tuesday, June 27

• The World Economic Forum in China, Tianjin
• CAD: Canada CPI
• EUR: ECB President Christine Lagarde speech in Sintra
• USD: US new home sales, Conference Board consumer confidence

Wednesday, June 28

• AUD: Australia monthly CPI
• CNH: China industrial profits
• Fed annual banking stress test results
• Panel discussion with ECB, Fed, BoJ & BoE heads in Sintra

Thursday, June 29

• AUD: Australia retail sales
• EUR: Eurozone economic and consumer confidence
• JPY: Japan retail sales
• USD: GDP QoQ, initial jobless claims, Atlanta Fed President Rafael Bostic speech

Friday, June 30

• CNH: China manufacturing and non-manufacturing PMI
• JPY: Tokyo CPI, unemployment, industrial production
• EUR: Eurozone CPI, unemployment
• US: US May PCE report, University of Michigan consumer sentiment  

Global sentiment remains shaky as central banks worldwide continue to battle stubborn inflation with high interest rates. In June, the Bank of England raised rates more than expected, the Federal Reserve paused but signalled more rate hikes ahead while the ECB stated that a July hike was ‘very likely’. Ultimately, this has fuelled recession fears as central banks ramp up their ammunition to bring down rising prices.

Investors need fresh clarity over what to expect next amid the uncertainty. This could be offered during Wednesday’s panel discussion featuring ECB’s Christine Lagarde, Fed Chair Jerome Powell, BOJ’s Kazuo Ueda, and BOE’s Andrew Bailey. Given how the chosen words of central bankers continue to influence markets, this mashup of financial heavyweights could trigger volatility across the board.

Markets could see more action thanks to inflation readings from the United States, Euro Area, Japan, and Australia. More signs of sticky inflation could fuel speculation around central banks keeping interest rates higher for longer – ultimately fanning recession fears and hitting risk sentiment.

With all the above discussed, here are 3 FX pairs on our radar:

• EURUSD rollercoaster ride?

The EURUSD could transform into a fierce battleground for bulls and bears in the week ahead due to comments from top policymakers and inflation data.

Fed Chair Jerome Powell reiterated the need for more rate hikes during his testimony at Congress while ECB Christine Lagarde signalled another rate hike in July at the ECB meeting in mid-July. Should both central bank heads convey a similar message during the ECB forum, this could spark volatility.

On Friday, both the euro-area inflation and the May US PCE report will be published. The preliminary reading for euro-are inflation for June is forecast to fall 5.6% year-on-year from 6.1% in May. Regarding the PCE deflator, it is forecast to rise 3.8% year-on-year from 4.4% in the previous month, while the core PCE deflator is projected to stay unchanged at 4.7%. Signs of sticky inflation could jolt the currency pair as investors weigh the impacts of higher interest rates on economic growth.

Looking at the technical picture, the EURUSD remains under pressure below the 1.0900 level. Sustained weakness below this point could open the doors back towards 1.0760 and lower. If prices push back above 1.0900, prices could test 1.1032 and 1.1090.

• Further upside for USDJPY?

The widening interest rate differentials between the Federal Reserve and Bank of Japan continue to fuel the USDJPY’s upside gains.

In June, the Bank of Japan maintained its ultra-easy monetary policy despite stronger-than-expected inflation. Investors will be keeping a close eye on comments from Bank of Japan’s Kazuo Ueda during the ECB forum for clues on future monetary policy. Focus will also fall on the latest Tokyo CPI figures released on Friday.

Talking technicals, the USDJPY remains firmly bullish on the daily charts. The recent breakout and daily close above 142.30 may open a path toward 145.50 and 146.70. Should prices slip back below 142.30, bears may target 141.00 and 138.80.

• What next for AUDUSD?

The past few days have been rough for the Australian dollar thanks to 'dovish' minutes from the Reserve Bank of Australia’s (RBA) early June meeting and China growth fears. More weakness could be on the horizon due to a stronger dollar and the overall risk-off sentiment.

Much attention will be directed towards Australia’s latest monthly inflation report published on Wednesday. Consumer prices are forecast to cool 6.1% year-on-year in May compared to the 6.8% witnessed in the prior month. Signs of cooling inflationary pressures may rekindle expectations around the RBA nearing the end of its hiking campaign. As of writing, traders are currently pricing in a 94% probability of a 25-basis point RBA hike by August 2023.

Regarding the technical outlook, the AUDUSD is under pressure on the daily charts. A solid breakdown below 0.6680 may open a path toward 0.6630 and 0.6570, respectively. Should prices push back above 0.6760, this could trigger an incline towards 0.6800 and 0.6880.

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