Week Ahead: Top 3 market-moving events

It’s a big couple of weeks for financial markets. This week a torrent of central bank meetings is likely to dictate key moves in the financial market landscape, while the end of the month sees the G20 meeting and, most likely, a binary outcome for the US/ China trade spat. 

Below we take a look at the top three fundamental and trading events that are worth watching this week.

1, The Federal Reserve meeting: Wednesday 

This is by far the most important event this week. Although the actual decision on monetary policy is not expected to move markets, there is a 75% chance that rates will remain on hold this week according to the CME Fedwatch tool. However, this week’s meeting is all about what the Fed signals for July. It’s worth noting that the Federal Reserve’s decision and statement is released at 1900 BST, with the press conference coming at 1930 BST. The market is fairly convinced that a Fed rate cut is coming in July, with a 68% chance of a 25bp rate cut now priced in, according to the CME Fedwatch tool. Interestingly, there is now a near 20% expectation of a 50-basis point rate cut, after asset management powerhouse Pimco said that it expected the Fed to cut rates by 50 basis points next month. 

The Federal Reserve is usually predictable, so if a rate cut is coming then we would expect it to signal such a move at this meeting. The first sign that a rate cut is coming would most likely be included in the statement, which is released at 1900 BST, this is when we would expect the bulk of the market move to take place. If the Fed hints that a rate cut is coming, we would expect 2 things to happen, firstly global stocks would likely surge, and the dollar may erase recent gains. However, the press conference is also worth watching closely, as that will be when the Fed is likely to explain its plans further. It may suggest that a single rate cut is all the easing that it believes is necessary, or it might hint that a 50-basis point cut is on the cards, or that a series of rate cuts is possible. The latter two scenarios are likely to be the “best” outcome for risky assets, and could have the most positive effect on global equity prices, whereas a one-and-done rate cut next month may not have a long-lasting impact on asset prices. 

Why we don’t think that Fed will cut rates 

We tend to agree with analysts at Goldman Sachs, who do not expect the Federal Reserve to cut interest rates this year. The Fed is arguably in a tricky position, it needs to reassure markets that it can and will act to protect the economy in case a recession becomes a likely scenario, however, we don’t believe that it will rush to cut rates at this stage. Thus, stocks could decline and erase even more of June’s gains if the Fed suggests that it won’t be cutting interest rates any time soon. The dollar, however, may continue to extend gains, particularly versus the dollar and the pound. As we lead up to the Fed meeting, GBP/USD is trading below $1.26, which is perilously close to the $1.2559 low from late May. If the dollar is to extend its rally this week then this key support level could be breached, and a move back to the 2019 low at $1.25, and potentially a move back to the early $1.20’s, could be possible. 

2, ECB and BOJ to clarify easing stance 

The other central bank meetings to watch this week include the Bank of Japan on Thursday. Although analysts do not expect the BOJ to move on rates this week, it may decide to implement a rate cut if the Fed signals a rate cut is coming for the US next month. A rate cut from the BOJ could be designed to stem JPY gains, thus USD/JPY could be the main beneficiary from any easing from the BOJ. However, it is worth noting that we think that the more likely outcome from this meeting is that the BOJ remains on hold, and only considers a rate cut if the Japanese sales tax rise that is due for October, weighs on domestic demand in the latter part of this year. 

Interestingly, the ECB has been at pains to suggest that it could re-start its stimulus programme to combat record low inflation expectations, however, this has had barely any impact on the euro. Even though German bond yields hit another record low last week, the euro had a strong start in June, and EUR/USD only started to fall in recent days. 

The ECB summit on 17-19 June has led to some explosive moves in the euro in the past; remember when Draghi said that deflation in the Euro-area had been eradicated back in 2017 and the euro soared? The same can’t be said of this year as Eurozone inflation expectations have hit a record low. Will Draghi and co. instead convince the market that it means business about reinstating its stimulus plan? If yes, then the euro could fall even further, with $1.1125 – the low from end of May – key support for EUR/USD. If, however, it doesn’t sound dovish enough then the euro could get a boost at the start of this week, with a move back to $1.1350 a possibility. 

3, Why gold fever is spreading 

If the Fed doesn’t signal that a rate cut is coming this week then gold could be the main beneficiary. Gold is close to its highest level of the year, and four important factors are driving the gold price even higher. Firstly, the prospect of deflation is a key driver of the precious metal. However, even if the Fed does signal a rate cut is on the cards later this week, we may still see gold rally. The prospect of a trade war and recessionary fears are positive for the price of gold, likewise, rising geopolitical tensions including between the US and Iran after last week’s explosions on oil tankers off the coast of Oman, also boost the appeal of holding precious metal in uncertain times. Another key factor that could determine the future of the gold price, is a global diversification in reserve currencies. On Monday, the US Treasury releases data on TIC flows, which measure the flows of money into and out of US assets including US government debt. In recent months this data has shown a sharp decline in the amount of foreign buying of US assets, which has also coincided with the ramping up of the US-China trade war. At the same time, the Chinese central bank is hoovering up gold. This could be the sign of a longer-term trend, which could be gold-positive for the long term. A key resistance level, $1,371, is now in view. This is the 5-year high for gold, and if this level is surpassed, then a move back above $1,400, and a longer term uptrend, may be likely.