The primary market themes for the past week have been weaker-than-expected inflation pressures, a surge in the energy sector due in part to a planned US withdrawal from the Iran nuclear deal, and a partial reduction in geopolitical risk concerns due to North Korea’s apparent display of cooperation in releasing hostages ahead of US/NK June talks. All of these developments have helped serve to relieve some pressure on equity markets in the past week, prompting a sharp surge for stocks and re-instilling a cautious measure of more bullish market sentiment after a prolonged period of volatile uncertainty. While global trade war threats continue to loom, markets have become less frenzied for the time being, and wild gyrations in the major indexes have noticeably decreased.
Dollar Reacts to Weak Inflation
As for the US dollar, the past week has been potentially pivotal. Expectations of accelerated US inflation have tentatively cooled due to a series of tepid data readings, including US wage growth last Friday, the producer price index on Wednesday, and the consumer price index on Thursday, all of which were generally weaker than expected. Cumulatively, these lower inflation readings have combined to give the US dollar some pause, as expectations of more aggressive interest rate increases from the Federal Reserve have begun to moderate. The US dollar initiated a pullback as a result, interrupting the sharp rally that had been in place for much of the past three weeks.
Central Bank Decisions
The past week also brought major monetary policy decisions from both the Bank of England and Reserve Bank of New Zealand. Both central banks kept interest rates unchanged as widely expected, and both leaned slightly dovish. Despite BoE Governor Mark Carney’s remarks about the temporary nature of Q1 economic and inflationary weakness, as well as the resilience of underlying economic growth, his comments were not enough to stem a continued sterling sell-off. Likewise, the New Zealand dollar also fell after the RBNZ lowered its GDP and inflation forecasts, and said that it expects to keep rates at 1.75% for a “considerable time.” While both the British pound and New Zealand dollar fell after the BoE and RBNZ events, respectively, the battered GBP/USD and NZD/USD remained supported in a holding pattern just off recent lows largely due to the recent pullback in the US dollar.
The Week Ahead – Jobs and GDP
The week ahead will be somewhat lighter in terms of major scheduled economic events than in the past week. The upcoming events with the greatest potential impact on currencies will likely be key employment data from both the UK and Australia, as well as GDP readings from Japan and the eurozone. Tuesday will feature the Reserve Bank of Australia's monetary policy meeting minutes, UK jobs data, eurozone GDP, UK inflation report hearings, and US retail sales. Wednesday brings Australia’s wage price index, Japan GDP, and US building permits and housing starts. Thursday features Australia’s monthly jobs report. Finally, Canada’s CPI and retail sales will round out the week on Friday.