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Weekly Outlook – FOMC minutes, RBA interest rate, Russian invasion of Ukraine

Weekly Outlook – FOMC minutes, RBA interest rate, Russian invasion of Ukraine

The investors’ attention will be kept this week by the Federal Reserve’s meeting minutes and by the last policy meeting of the European Central Bank. Forecasts do not preview any significant change in the policy of the Reserve Bank of Australia. The unstable geopolitical situation in Ukraine has the highest chance to impact the market movements during this week.

 

Europe depends on the evolution of the Ukraine/Russia conflict

As Russian forces withdraw from the Kyiv area to concentrate in the southern and eastern regions, and an agreement of ceasefire seems to become feasible, the markets could welcome some good news. But tensions are still at high levels between the EU and Russia, a fact that generates economic instability.

In response to sanctions imposed by the West, Putin asked last week that all Russian gas purchases be paid in roubles. G7 rejected the requirement. The sharp hostilities between Russia and its largest export markets will entertain high volatility and prices in commodity markets, until more favourable evolutions.

Such an unstable and inflammable situation combined with the inflation data multiplies the pressure on ECB to increase the rates. Insights of interest could be revealed on Thursday during the minutes.

The war crimes in Ukraine are likely to trigger supplementary sanctions imposed on Russia. A hot topic to keep an eye on this week.

U.S. and the FOMC minutes

Thanks to the solid data from the US concerning the wages growth and jobs numbers, the stock markets closed the previous week on the rise and currencies were mixed.

A strong labour market hints at an economy with sound fundamentals if the high level of inflation (the highest in the last 40 years) and low level of consumer sentiment (the lowest in the past decade) are ignored.

Last month the FOMC minutes revealed that the Committee decided to increase the rates to 0.5% and indicated that more rate upgrades are to be expected. This Wednesday traders and investors will look closely for any hints of potential new hikes that may arrive in May. And, also, will review the discussions related to the reduction of the Fed’s balance sheet. Any clues on the volume of quantitative tightening will eventually impact the Treasury yields and the US dollar.

Another event worth mentioning from last week, the inversion of the yield curves of the 2-Years and 10-Years US Treasury bonds is anticipating monetary policy tightening. This inversion usually is an indicator of recession and it appeared last time in 2006.

Even if stock markets closed on a relatively bullish movement, S&P 500 index evolves near the 200-day MA indicating more of a consolidation movement than an ascendant price move.

 

Australia and its RBA policy

Lately, the Reserve Bank of Australia’s attitude remained dovish despite signs of economic overheating. The members of the committee declared they will remain patient to see the evolution of the inflation stabilizing sustainably somewhere between 2-3% until next year.

Will the RBA change the guidance as inflation soars? Most probably not, for this month. But hints about a possible future rate rise in the following months may appear.

For the moment, the Australian dollar will follow the general sentiment of the market and the evolution of commodity prices.