Week Ahead: G7, Central Banks and Key Data Take Centre Stage

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Ahead of next week’s major central bank meetings and key data releases, the market’s focus has turned to trade tensions as the G7 meetings get underway in Canada and it looks like US President Donald Trump is taking on the whole world. While leaders of the “G7-1” are showing great unity, Trump continues to isolate himself by demanding “fair” trade agreements especially with Canada and the EU. Mr Trump has clashed with Canada’s PM Justin Trudeau, who described Mr Trump's citing of national security to defend his steel and aluminium tariffs as "laughable." Trump accused Trudeau of being "indignant," in a tweet. French President Emmanuel Macron warned that the other six nations of G7 would sign their own agreement if Tump chooses to go his own way, adding that no head of state is "eternal.” German chancellor Merkel has already vowed to challenge Trump on several issues, including trade and climate. As Trump departed for negotiations with other world leaders he even called for Russia to be allowed back into the group.

Trade war concerns hold back equities slightly

The apparent lack of room for compromise and hostile relationship of Trump with some of his G7 counterparts means the leaders may fail to agree on a final statement, an outcome which would be unprecedented. Some market participants are worried that this may lead to a full blown trade war, leading to some profit taking on risky assets ahead of the weekend. However, it wasn’t a full-blown sell-off either, suggesting that at least some investors are hopeful that there may be a more market-friendly outcome and the hostile atmosphere in trade relations will be repaired.

The other key consideration for market participants is the outlook for tighter monetary conditions amid hawkish talk from key central bank members and signs of improving global economy.

Last week, Eurozone CPI came in sharply above expectations, rising to 1.9% from 1.2% previously. This was followed by better-than-expected economic data from the US where personal spending, core PCE price index, ISM manufacturing PMI and the monthly jobs report with average hourly earnings all coming in ahead of expectations. The UK scored a hat-trick of better-than-expected PMIs with the manufacturing, construction and services sectors all showing decent numbers. From, Australia we have had stronger-than-expected retail sales and GDP, with the latter showing a solid 1% growth.

Fed, ECB and BoJ policy decisions loom

These macroeconomic pointers have helped to reduce concerns over a slowing global economy and offset worries over global trade. Investors are also not too alarmed about the prospects of tighter monetary conditions, at least for now anyway.  That could change next week though as we have three major central bank meetings – Federal Reserve, European Central Bank and Bank of Japan – to look forward to, along with key consumer inflation data from both the UK and US, with the former also publishing its latest earnings figures. We will also have key employment figures from Australia along with Chinese and US industrial productions numbers.

End of ECB QE chatter boosts euro

Although the Federal Reserve is almost certain to raise interest rates on Wednesday, it is the European Central Bank which all of a sudden is looking to be the more anticipated meeting. Don’t get me wrong, there won’t be any surprise rate hikes on Thursday but top ECB policymakers have delivered hawkish remarks on the Eurozone economy this week and this has led to some chatter that the central bank may announce its intention to end EQ at the end of the year.

ECB’s Peter Praet has said that there is “growing evidence that labour market tightness is translating into a stronger pick-up in wage growth,” with Jens Weidmann echoing those views saying that inflation is “now expected to gradually return to levels compatible with our target.” Klaas Knot has added that the ECB should wind down QE as soon as possible. We have heard these views before and they are not entirely surprising. But the fact that they are coming all at the same time is what has bolstered end of QE speculation.

EUR/USD in sharp focus

Should the ECB provide a clear hint about end of QE then the euro could find significant support as investors prepare for tighter monetary conditions in the Eurozone. As far as the Fed’s decision is concerned, a rate hike should be fully priced in. Thus, the USD/EUR (i.e. EUR/USD inversed) may only get a temporary boost on Wednesday before easing back until the ECB’s press conference on Thursday afternoon.

Ahead of the FOMC and ECB meetings, the EUR/USD has put in a potentially bullish reversal pattern on its weekly time frame: a false break below the prior swing low of 1.1555. For as long as rates remain above this level then the bias would remain bullish, although in the short-term the bulls would ideally want to see the high of last week’s range at 1.1730 hold. If this level were to break however then we may get a short-term pullback towards 1.1600 and possibly even 1.1555 again. Resistance comes in at 1.1825 – a decisive break above this level could pave the way for 1.20s next.

Source: eSignal and FOREX.com.