Core PCE inflation to test bets of two Fed rate cuts in 2024. Yen awaits BoJ Summary of Opinions, Tokyo CPI. Canadian CPI data also enters the spotlight.
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Welcome to another episode of Global Market Insights brought to you by XM.com, where we provide meaningful and informative content about the events that affect market trends and shape global markets. Hello, and welcome to the weekly forex outlook at XM.com. The highlight for Dollar Traders next week will be the core PCE price index. Will this data confirm bets of two Fed rate cuts in 2024? We'll also discuss data coming out in Japan and Canada and the potential reactions in their respective currencies. I'm Maria Fasher-Dazs, and joining me to discuss all this is Senior Investment Analyst Harlan Busby-Sudos. So Harlan was last week we got softer than expected CPI numbers in the US, and this week retail sales numbers were weaker than expected. Next week the core PCE price index for May is due out on Friday. What are we expecting there? And how might this data impact the Fed's rate path and the dollar? Hello, Maria. Yes, indeed, we got softer than expected CPI numbers and weaker retail sales. And to be honest, maybe that's why investors remain convinced that the Fed will proceed with two quarter point rate cuts this year, despite the updated dot plot pointing to just one. They are also assigning around a 70% chance for the first rate cut to be delivered in September. Now as for the core PCE index, this is the Fed's favorite inflation metric and it is accompanied by personal income and spending data. Now the slide in the core CPI for the month of May poses some downside risks to the core PC print, and there may be downside risks to spending as well, derived by the weakness in rate cases. Although income may be poised to improve something suggested by the better than expected average hourly earnings. Overall though, another set of economic data pointing to cooling consumer demand may further solidify expectations of two quarter point rate cuts by the Fed, and perhaps increase the probability for officials initiating the process in September. This could prove negative for the U.S. dollar, especially against its Australian counterpart. Remember that at these weeks, meeting the RBA maintained its neutral stance while Governor Bullock revealed that they discussed the option of raising interest rates. Coming to Japan now, at last week's meeting, the Bank of Japan decided to keep rates unchanged. Next week, the summary of opinions from that meeting will be out on Monday, and we'll also get the Tokyo CPIs for June on Friday. How likely is a July hike by the BOJ? And what should yen traders be on the lookout for? Yes, at last week's, Métis de Bango, Japan stood pat, but they said that they would start trimming their bond purchases, although they will announce a detailed plan the next month. On top of that, Governor Weather said that he is not ruling out an interest rate hike in July, still the yen fell. Perhaps that was because some market participants were expecting more concrete signals about the July hike and a potential slowdown in bond purchases. This is also evident by market pricing where the probability for a 10 basis points hike in July has dropped significantly to around 27%. Ahead of the decision, that chance was more than 65%. Now, all these suggests that yen traders will dig into the summary of opinions for clearer hints on how likely a July hike is. If they are left once again disappointed, the yen is likely to extend its slide and perhaps take another hit if they do a CPI is pulled back below the bank's 2% objective again. Now, having said all that though, with dollar yen already trading near the 159 zone, further advances closer to the round number of 160 may significantly increase the risk of another intervention episode by Japanese authorities, although officials have been silent until now. And finally, turning to Canada, earlier this month the BOC became the 2nd central bank in the G10 group to cut rates by 25 basis points. Next week on Tuesday, we'll get Canada's CPI numbers. How do you think this data might impact the BOC's rate path and what's the outlook for the Canadian Dollar? You are very correct, Maria. The Bank of Canada cut interest rates at its latest meeting with Governor Mark Klem signaling that it is reasonable to expect further reductions if inflation continues to cool. That's why the inflation data next week may attract special attention. The probability of a back-to-back rate cut at the upcoming gathering currently rests at around 62% and should next week's data reveal that inflation continued to trend south, that probability could go higher. This could prove negative for the Canadian Dollar. Our love was thanks so much. This was the Weekly Forex Outlook here at xm.com. Thank you for listening to another episode of Global Market Insights brought to you by xm.com. For more in-depth technical and fundamental analysis, be sure to visit www.xm.com/research. [BLANK_AUDIO]
