Equity and currency traders will have lot of news to digest the week ahead. On the monetary side, central banks in U.S. and Japan will both announce their interest rate decisions. On the data front, second quarter GDP results from the U.S., Eurozone, and the U.K. will provide a snapshot on how major economies performed pre-Brexit. And whether U.S. stocks will continue pushing toward new highs, hinge on the big tech firms due to announce earning results.
Monetary policy divergence to keep pushing the dollar higher
The U.S. dollar appreciated among all its major peers the past week to settle at its highest levels since March 10. A combination of upbeat data and expectations of continued divergence in monetary policies have been the main drivers for the dollar strength. When looking at major central banks around the globe, most acknowledged their willingness to ease further during the next couple of months, meanwhile Fed officials seem more optimistic on the performance of the U.S. economy, and markets responded by repricing expectations for a rate hike in 2016 to 45% from 12% three weeks ago.
Although U.S. economic data picked up later in second quarter, a rate hike will not be on the table when the Fed meets on Wednesday as concerns over Brexit and U.S. elections are far from over. Only minor tweaks from the statement from the last meeting in June-15 are likely to to be seen at best. Investors looking for guidance on the Fed’s next move might be disappointed as officials unintentionally misguided markets by the four rate hikes expected at the beginning of the year and don’t want to fall in the same trap again. However, I expect the dollar strength to resume as most major central banks looking toward more easing.
The BoJ is likely to be a more interesting meeting as markets seem divided on whether the central bank will ease on Friday. The Yen strengthened from a 6-week low against the dollar on Thursday after governor Haruhiko Kuroda said the bank saw no need to stimulate the economy with “helicopter money.” From a fiscal perspective, Prime Minister Shinzo Abe said that the government will announce a large spending package by the end of this month. A coordinated fiscal and monetary move is the key to send USDJPY higher, however I believe that BoJ will hold fire until the budget plan is announced. If the central bank decided to act this week by cutting key rates to -0.2% and expanding the asset purchase program, then 110 could be the imminent target for USDJPY
Second quarter growth figures for the U.S., Eurozone, and the U.K. will dominate the economic agenda. Markets are most interested in the U.S. figures as a huge rebound is anticipated from the first three months of 2016. However, taking into consideration that these numbers do not reflect the Brexit impact, markets reaction likely to be muted.
Tech giants’ earnings
The S&P 500 ended Friday on a record high of 2,175. Probably the question on most investors mind now is how far the rally can resume? Or are we getting closer to enter a correction territory?
The answer in the short-run depends on how the Tech industry performed in second quarter. More than 190 of the S&P 500 companies are expected to report their quarterly earnings this week, but the heavy weight tech firms will decide whether the index can move higher from current record levels. Apple, Alphabet, Facebook and Amazon, are all on the earning calendar.
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Written by Hussein Sayed, Chief Market Strategist at FXTM
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