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Australian Inflation, Fed Rate + Policy Statement, Eurozone GDP & Inflation
Weekly Outlook

Australian Inflation, Fed Rate + Policy Statement, Eurozone GDP & Inflation

by Ricardo Evangelista - 26 Jul 2021

Last week was marked by a sudden shift in investor sentiment, with risk aversion taking over on Monday, resulting from growing concerns over the dangers posed by the Delta variant of the virus. Assets, such as stocks, oil and risk related currencies all took a tumble, as investors priced-in the possibility of a slower than expected economic recovery. However, the pessimism didn’t last and by Friday it was risk-on across the board. This week we will preview the release of Australian inflation data, the Fed’s interest rate decision and policy statement, ending our analysis by zooming-in on the Eurozone’s GDP and consumer prices Index.

Early on Wednesday the Australian Bureau of Statistics will release inflation data covering the second quarter of the year. This is usually seen as an important moment for traders of the Ozzie dollar as it  impacts the Royal Bank of Australia’s decision-making process.

The Australian dollar hit a multi-month low last week, before staging a modest recover as the week progressed. The Ozzie has been under pressure due to global concerns related to the Delta variant that can affect the markets appetite for risk related currencies. On the domestic front the situation is also tough, with a batch of economic data, which was published last week, revealing weaknesses.

The RBA recently unveiled plans to start tapering its asset purchases, however, given the deteriorating economic situation, the central bank may be forced to rethink its intentions. Should inflation data disappoint, there will be a good chance that the plans to tighten policies will be shelved, a scenario that would weigh-down on the Ozzie dollar.

Also, on Wednesday the US Federal Reserve will reveal its latest rate decision and policy statement, with the announcement being followed by the usual FOMC press conference. This will surely be one of those moments when investors will be paying close attention to their screens. The way the markets perceive the intentions of the Fed in relation to the timing of the tapering and rate hikes has been one of the main vectors behind the price action of a wide range of instruments that includes all the major currencies, gold, oil and beyond.

Although no changes in policies are expected in the near term, the way the message is communicated will be extremely important. Should the tone reflect confidence in the progress of the economic recovery, hinting at inflation-related worries, the dollar will be likely to find support. On the other hand, it is also possible that the latest employment data, which disappointed, will me mentioned, which would translate into a bearish signal for the greenback.

We’ll end our weekly preview by zooming in on the release of eurozone inflation and GDP data, coming out on Friday. This is will be an important moment for euro traders, with high readings on both accounts likely to offer support to the single currency. Last week the president of the European Central Bank formally announced the review of the institution’s policy strategy, one that marks a significant dovish pivot, creating conditions for the continuations of the current low rates for longer, even if inflation does, at times, exceed the target of 2%.

There are signs of a growing divergence between the stance of the ECB and that of the FED. While in Europe the pivot was towards a more dovish posture, on the other side of the Atlantic there are clear signs of growing hawkishness amongst Fed officials. The main reason for this discrepancy is inflation, with the latest figure in the US reading at 5.4% while Europe recorded only 1.9%. Should the old continent’s consumer prices disappoint again, the euro will be likely to suffer.

This is all for today. We will be back next Monday with another weekly preview!

 

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