FX Week Ahead – Top 5 Events: Canada Inflation Rate; Fed Rate Decision; BOJ Rate Decision; SNB Rate Decision; BOE Rate Decision

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FX Week Ahead Overview:

  • As the calendar rolls into the second half of the month, central banks are squarely in focus over the coming days.
  • Both the Federal Reserve and the Swiss National Bank are expected to hike rates by 75-bps.
  • After delaying their meeting due to Queen Elizabeth’s death, the Bank of England is forecast to raise rates by 50-bps. Meanwhile, the Bank of Japan will likely stay on hold.

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09/20 TUESDAY | 12:30 GMT | CAD Inflation Rate (CPI) (AUG)

A quick pace of rate hikes by the Bank of Canada thus far in 2022 may be finally alleviating inflation in Canada. According to a Bloomberg News survey, the August Canada inflation rate (CPI) is due in at -0.1% m/m from +0.1% m/m and +7.3% y/y from +7.6% y/y, while core inflation is expected at +0.4% m/m from +0.5% m/m and +6% y/y from +6.1% y/y. With the BOC suggesting that it has been front-loading interest rate hikes – suggesting that the pace of future rate hikes will slow – signs of diminishing inflation pressures may serve to undercut the Canadian Dollar.

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09/21 WEDNESDAY | 18:00, 18:30 GMT | USD Federal Reserve Rate Decision & Press Conference

All things considered, it is a fairly light week on the US economic calendar. But the limited schedule of releases will be punctuated by the September Federal Reserve rate decision, far and away the most important item on the calendar among any major currency over the coming days.

September thus far has been defined by rapidly rising Fed rate hike odds. On August 1, there was one 25-bps rate hike priced-in through the end of 2022, with a 34% chance of a second 25-bps rate hike (50-bps in total by the end of the year). Now, 75-bps worth of rate hikes are fully discounted, with a 44% chance of a fourth 25-bps rate hike.

To an extent, the market is suggesting that the last few Fed rate hikes may materialize in the coming months – with the bulk of the tightening efforts arriving this week, where a 75-bps rate hike is the base case scenario. Given the outside chance of a 100-bps rate hike, should the Fed deliver 75-bps and not offer hawkish forward guidance, the September Fed meeting could shape up to be a ‘buy the rumor, sell the news’ event for the US Dollar.

09/22 THURSDAY | 03:00 GMT | JPY Bank of Japan Rate Decision

Bank of Japan rate decisions remain low on the totem pole in terms of importance relative to other central banks – particularly this week. But with the Japanese Yen persisting at its weakest exchange rate in decades, questions have swirled about the BOJ’s commitment to asset purchases and keeping the JGB 10-year yield capped at 0.25% (also known as QQE with yield curve control). While it may seem otherwise, this week’s BOJ meetinghas plenty of risk for FX markets: the base case scenario is wherethe BOJ recommits to keeping yields capped, which means the Yen will likely take another leg lower; or, far less likely, the BOJ throws in the towel on its QQE with yield curve control policy, paving the path for a rebound by the Japanese Yen.

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09/22 THURSDAY | 07:30 GMT | CHF Swiss National Bank Rate Decision

In June, the SNB surprised markets with a 50-bps rate hike, the first such move since 2015. It appears that SNB policymakers are ready to take things a step further this week, where a 75-bps rate hike – bringing the main rate from -0.25% to 0.50% – is expected. With Swiss inflation running at its highest level in 30 years, SNB officials are content with allowing a stronger Swiss Franc to help head off price pressures. The SNB may likewise offer hawkish forward guidance, signaling additional rate hikes over the coming months.

09/22 THURSDAY | 11:00 GMT | GBP Bank of England Rate Decision

UK stagflation risks remain elevated as growth slows and inflation continues to point higher. But BOE policymakers are still focused on the latter of these two issues, as rates markets are discounting a 50-bps rate hike – boosting the main rate to 2.25% from 1.75% – this week. Further hikes are likely to be suggested, as the BOE’s expected terminal rate for 2022 now sits at 3.608%, up from 3.365% one month ago, which means at least an additional 125-bps of hikes are priced-in after the September BOE meeting.

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— Written by Christopher Vecchio, CFA, Senior Strategist

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