Week Ahead: Inflation to support rate rises amid central bank meetings

It’s a jam-packed week of data and central bank meetings. War fears among investors are declining despite the horrific footage from Ukraine and little progress in peace talks. Peak financial stress has dissipated somewhat with the global economy expected to cope with the negative financial shock.

It is monetary policy which is all encompassing now, as elevated commodity prices increase already high underlying inflation pressure. Significant tightening in the US, especially after last week’s hawkish Fed comments, has seen the dollar hit near two-year highs. Tuesday’s 8%+ US CPI print will likely add to this hawkishness and could settle the debate about the size of the next rate rise . This all reflects the bullish tone for the DXY, after breaking out of the March consolidation zone. The 100 level is close to a Fib mark to watch as resistance, with the next upside target at 100.55.

Yet another challenging ECB meeting awaits on Thursday with the economic outlook particularly uncertain. The press conference is likely to see President Lagarde walk the tightrope between keeping the door open to combatting high inflation and the worsening economic picture. With limited economic tailwinds, the euro has struggled to find any support, with seven straight down days. A drop below 1.08 points to a fast fall to the next big figure.

Further rate rises are expected from both the Bank of Canada and the RBNZ this week. The latter would mark a fourth consecutive hike while the BoC should act aggressively and back up their recent strong words with a 50bps move. USD/CAD has hit strong resistance at the 200-day SMA at 1.2618. The breakdown in the kiwi could head towards the 50 and 100-day SMA zone at 0.6785/89.

Major risk events of the week

11 April 2022, Monday:

-UK GDP: Analysts expect an increase in output of 0.3%, down from the 0.8% rise in January. Storm Eunice, falling retail sales and a drop in the Covid vaccinations and tests likely weighed, even as some supply shortages eased. Going forward, the cost-of-living crisis is expected to be a major drag.

12 April, Tuesday:

UK Jobs: Consensus expects the January jobless rate to ease a tenth to 3.8%. Strong labour market momentum and the current tightness is set to continue in the near term with wage growth remaining strong. Inflationary pressures are likely to weigh on household spending further out, which may limit more job gains.

US CPI: March inflation is set to hit new multi-decade highs at 8.4% for the headline and 6.6% for the core. Price pressures are broad based with the surge in gasoline and food prices notable. Supply chain issues and rising commodity prices add to the inflationary mix.

13 April 2022, Wednesday:

RBNZ Meeting: Markets err on the side of another 25bp rate hike to 1.25%, though it is a close call with a bigger half percentage point move possible. There has been little guidance from policymakers since the last meeting with an unusually light data flow. Rising near-term inflation is the major issue, similar to most central bankers.

UK CPI: Broad based price rises are forecast to carry on after January’s 6.2% print marked a 40-year high. Analysts forecast a pick-up to 6.7% and 5.4% in the core. A spike is seen in the April inflation figure as the 54% increase in the energy price cap kicks in.

Bank of Canada Meeting: Markets have virtually priced in a 50bp rate hike. Inflation is at multi-decade highs, employment is at record levels and commodity prices are elevated. The big five Canadian banks expect another half-point rate rise at the June meeting, taking rates close to 2.25% by the end of 2022.

14 April 2022, Thursday:

ECB Meeting: In light of the Ukraine crisis, most analysts expect the bank to stand pat and continue with the announced reduction in net asset purchases. Looming stagflation is complicating matters and the rift between the hawks and doves has likely widened. Markets currently price in 65bps of rate hikes this year.  

US Retail Sales: After January’s 3.8% jump, the February headline print is expected at 0.4%. Analysts see the surge in gasoline prices impacting the headline figure. But jobs growth and wages continue to rise, partially offsetting the higher cost of living.

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