Week Ahead: EURUSD to react to ECB policy clues, US inflation

The world’s most popularly-traded currency pair, EURUSD, is set to face two major catalysts in the coming week:

Monday, June 6

• AUD: Australia May inflation gauge
• CNH: China May Caixin Services PMI
• Apple’s Worldwide Developers conference (held online)

Tuesday, June 7

• AUD: Reserve Bank of Australia (RBA) rate decision
• EUR: Germany April factory orders
• GBP: UK May services PMI (final)
• Gold: World Bank releases “Global Economic Prospects” report

Wednesday, June 8

• EUR: Germany April industrial production
• Gold: OECD publishes Economic Outlook
• US crude: EIA weekly US crude inventories

Thursday, June 9

• CNH: China May external trade
• EUR: ECB rate decision
• USD: US weekly initial jobless claims

Friday, June 10

• CNH: China May CPI and PPI
• RUB: Bank of Russia rate decision
• CAD: Canada May unemployment rate
• USD: US May consumer price index, June consumer sentiment

 

First up for EURUSD traders, is the keenly-awaited European Central Bank policy meeting.

To be clear, policymakers are not expected to adjust the central bank’s deposit rate this month.

However, what ECB President Christine Lagarde signals about future policy moves will be more crucial for markets.

As things stand, the ECB’s benchmark rate is at negative 0.5%.

Markets are widely expecting the first of a series of ECB rate hikes to commence in July (with Lagarde essentially confirming as much via a blog post on May 23rd).

The ECB is then set to exit its negative interest rates regime before Q3 is over, which implies two 25 basis point hikes at its July and September meetings.

 

However, what’s up for debate is whether the ECB can afford to maintain such a relatively “tepid” approach to quelling runaway consumer prices.

A week after Lagarde’s blog post, the Eurozone’s headline CPI print for May came in at 8.1% - a fresh record high, as well as exceeding the market’s median estimate of 7.8%.

Also note that several of the ECB’s peers, from the Fed to the RBNZ, have already triggered larger-than-usual hikes of 50 basis points in one go (twice the customary adjustments of 25 basis points at a time).

As such, it appears that the impetus is for the ECB to act more aggressively and trigger larger rate hikes, perhaps even a 50 bps hike in July.

If Lagarde’s press conference in the coming week suggests as much, such extra-hawkish cues should see EURUSD spiking higher.

If so, euro bulls are likely to eye the 1.09 mark, while also potentially solidifying the pair's 50-day simple moving average as a key support level.

 

But that’s not the be all end all for EURUSD in the week ahead.

The day after Lagarde’s press conference, traders would then have to pay close attention to the incoming US inflation print.

At the time of writing, markets are expecting the consumer price index to have risen by 8.2% in May, compared to the same month last year.

If so, that would suggest that US inflation may have peaked, considering that April’s CPI grew 8.3% year-on-year.

If markets sense that the Fed can ease away from its ultra-aggressive stance, with the view that US consumer prices are moderating, that may translate into an even softer US dollar which in turn allows the euro (and the ECB) to play catch up.

However, noting that the EU economy still faces stark downside risks given the looming prospects of an energy crisis due to sanctions imposed on Russian fuel exports, any relief for EURUSD is set to be limited.

This currency pair will have all to do to break out of its downtrend that has persisted over the past 12 months.

 

EURUSD Euro ECB European Central Bank rate hike inflation Ukraine crisis FED FOMC