We’ve got two major events coming up tomorrow that could rile up the currency markets. The first is in Europe and the second in the US session. The market is paying extra attention to inflation data as central banks across the board are expected to shift to an easing bias.
The next couple of days will see a barrage of UK data, covering the most important aspects of the economy. The main releases will be the CPI tomorrow and retail sales the day after.
Both of these could inject further volatility into sterling pairs. As if there wasn’t already enough source of volatility with the Tory leadership contest and Brexit.
Comparatively, Canada’s economic calendar is relatively light. After tomorrow’s inflation data we have retail sales on Friday. But this doesn’t mean the USDCAD is going to be quiet since we have a host of major data on the US side of the pair for this week as well.
What We Are Looking For
Of all the data coming out at 10:30 CET (04:30 EST), the annual Consumer Price Index figure will get the most attention from the market. PPI Core Output can also move the market, but that’s only secondary if all the inflation data comes in line.
Expectations are for the UK annual inflation to come in at 2.0%. This is a slight drop from the 2.1% last month, and bang in line with the BOE’s interest rate target.
The consensus among economists was that the bank was leaning towards tightening. In fact, they believe their next move will be a hike. This was after inflation remained well above the target during most of last year. And it has been creeping up since the beginning of the year.
The Market Moves
How the currency responds depends on how the data will affect the BOE’s inflation outlook.
Below 2.0% could be interpreted as inflationary pressure easing and give the central bank some leeway to hold the rates relatively low going forward. Given the myriad of economic risks facing the UK and the uncertainty around Brexit, the BOE would prefer a lower rate.
Above 2.1% would show that the inflation rate is continuing its growth pattern and returning to the average of last year. This would bring forward the potential of a rate hike. Also, it would set the BOE in the opposite direction in terms of monetary policy since most other major central banks are expected to be more accommodative. We could see some substantial strengthening of the pound.
Canada is Remaining Quiet
For Canada, we want to pay attention to the Core CPI monthly rate, since that’s the one the BOC follows for setting the rate. The consensus among analysts is for a drop in the inflation rate to 0.2% monthly from 0.4% prior.
We can expect the annual CPI rate to tick up to 2.1% from the 2.0% seen in April. This would be a continuation of the trend that it’s been holding since the beginning of the year.
There is a pretty broad consensus that the BOC will stay out of the market for at least the rest of the year. With the inflation rate comfortably around the midpoint of their target range, there isn’t much to suggest they will change their stance in the near future.