Week Ahead – Flaming Dollar Looks at PCE Inflation; Flash PMI and BoE too

Posted on June 18, 2021 at 12:28 GMTRaffi Boyadjian, XM Investment Research Desk

After the Fed’s steep but not entirely unexpected hawkish turn, the supercharged US dollar is hoping for another boost from next week’s PCE inflation data. Meanwhile, flash PMI readings for June will circle all major markets. PMI’s forward-looking surveys could further bolster declining speculation – not only for the United States but also elsewhere – as economies around the world reopen with the help of ramping up vaccinations. In the realm of central banking, the Bank of England is next to set policy. However, further political signals are unlikely before the August meeting, so the pound may have to wait a bit longer before facing the dollar king.

Dollar is biggest winner after hawkish FOMC as yields retreat

The June FOMC meeting was quite decisive for the greenback, but it is questionable if anything has tangibly changed for the markets. The point is, Fed policymakers repeatedly hinted as the meeting approached that the time to start talking about phasing out might be nigh and that the consensus to start policy tightening had been reached. formed a long time ago around September, and this has remained unchanged.

That said, the hawkish turn was undeniable, as FOMC members predicted not one but two rate hikes for 2023, only predicting in March that they would remain on hold throughout the year. More worryingly, Fed Chairman Jerome Powell is no longer so certain that the rise in inflation will be transient.

However, although Treasury yields rose after the meeting, they had fallen excessively in the previous days and the 10-year yield only managed to return to the range in which it had consolidated for most of the time. April and May. The most notable impact was on the dollar, which had slowly climbed higher since late May, only to be held back by the bewildering drop in yields. But now that yields have rebounded, nothing is stopping the dollar from rising.

The only problem, however, is that the rebound in Treasury yields has already started to weaken, and bond traders may need to be more convinced that the risk of a much more hawkish Fed is real, or the dollar’s rally could be real. not be sustainable.

Will PCE inflation scare the markets?

Next week’s Bureau of Economic Analysis report on personal income and expenditure, as well as the PCE price indexes, could help to give more momentum to the bond selloff. The core PCE price index – the Fed’s preferred inflation gauge – is expected to have jumped 3.0% to 3.5% year-on-year in May. That’s well above the 2% target, but not as shocking as the 5% CPI. The monthly increase is expected at 0.6%, which is even more worrying.

These upward pressures on prices are partly explained by the increase in consumption resulting from the fiscal stimulus and pent-up demand. The Fed hopes these effects wear off over time, but is undoubtedly monitoring personal income and consumption numbers closely.

Personal income is expected to have declined 2.0% m / m in May, while consumption was likely 0.4% higher.

Other data to watch in the United States next week are existing home sales on Tuesday, new home sales and flash PMIs on Wednesday, as well as durable goods orders and the final GDP estimate for the first quarter on Thursday. .

Bank of England meets but could remain silent on cut

Across the Atlantic, the pound sterling will seek to turn the tide after a murderous week for cable. Traders can look forward to UK flash PMIs on Wednesday and the Bank of England policy meeting on Thursday for a further rise. Preliminary PMIs for June will be interesting as they could indicate that the recovery in the services and manufacturing sectors is easing slightly as the reopening effect eases somewhat, although the warmer weather may have kept the spending spree.

However, the Bank of England isn’t expecting much new as it won’t be a Super-Thursday meeting, so there won’t be a press conference or updated economic forecast. day. The Bank will likely wait until its August meeting before deciding to further slow down its bond purchases and signal a potential extension of QE beyond the end of 2021. But there could be some surprises.

If policymakers change their language on the outlook for inflation and growth, acknowledging recent strong CPI and GDP data, investors could see this as a sign that the Bank is moving closer to making a formal decision. declining, which could give the pound a boost. .

The euro takes a hit; Can Optimistic PMIs Help?

The euro has been hit even harder than the pound by the Fed’s hawkish trend, as the European Central Bank has recently swung in the opposite direction and therefore could be the last of the major central banks to exit its stimulus policies. in the event of a pandemic.

Still, there could be some love for the single currency on Wednesday from the latest PMI reports. The manufacturing PMI index is expected to dip slightly to 62.1 in June, after setting records in the past three months. But the services PMI is expected to continue climbing in June, reaching 57.6, as many eurozone countries lag slightly behind the US and UK in lifting restrictions and loosening their rules. of social distancing than now.

On Thursday, the Ifo business climate gauge in Germany should paint an equally rosy picture for June.

However, another solid set of survey data might not necessarily be large enough to support the euro given the growing divergence in monetary policies between America and Europe. After plunging below $ 1.20 following the Fed meeting, it will be difficult for the Euro / Dollar to recover the psychologically important grip purely on the back of some bullish data.

The Australian and the loonie left in shock

Flash PMI figures are also expected in Australia and Japan on Wednesday, while preliminary retail sales figures for May will also be on the Aussie’s agenda on Monday.

The Australian dollar was no exception being toppled by the resurgence of the US dollar and after a significantly stronger-than-expected employment jump did not provide much support, the week’s posts next should also not soften the decline of the currency.

The loonie is in a similar situation and Wednesday’s report on retail sales in Canada is unlikely to do much to reverse some of last week’s losses.

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