Errante's The Week Ahead: 16th to 20th September 2024

Errante’s The Week Ahead: 16th to 20th September 2024

Highlights of the Week:

FOMC Meeting: A key focus will be the Federal Reserve’s decision, with speculation on whether they will reduce interest rates from 5.5% to 5.25%.

Bank of England (BoE) Rate Decision: Expectations are for the BoE to hold rates steady at 5%, but concerns over the UK economy may influence the vote split.

Bank of Japan (BoJ) Policy Statement: The market anticipates BoJ maintaining ultra-low rates, but any hawkish signals could significantly impact the yen.

Now What?

As we approach the week of September 16th to 20th, 2024, the global market focus turns toward pivotal central bank decisions, with the Federal Open Market Committee (FOMC), Bank of England (BoE), and Bank of Japan (BoJ) set to announce key monetary policies. The narrative in recent months has centered around slowing global economic growth, moderating inflation, and a labor market showing signs of strain, giving central banks more room to adopt dovish stances in the coming months.

Federal Reserve (FOMC)

The upcoming FOMC decision holds significant weight as traders and investors closely follow the Federal Reserve’s potential move towards easing monetary policy. With inflation moderating and headline CPI falling to 2.5% year-over-year, coupled with a softer labor market and sluggish retail sales, the probability of a rate cut has risen. Despite some persistent core inflation, the overall trend shows that inflationary pressures are abating, which strengthens the case for a rate cut at this meeting or later in the year. However, the Fed will have to balance inflation management against supporting economic growth, making their projections critical in guiding future market sentiment.

Bank of England (BoE)

The BoE finds itself in a similarly challenging position, as inflation, while still elevated at 2.2%, shows signs of stabilizing. The UK’s labor market is softening, with rising unemployment and weaker wage growth. Retail sales have been sluggish, signaling weaker consumer demand. While a rate cut at this meeting may not materialize, growing economic pressure could prompt the BoE to adopt a more dovish tone, potentially paving the way for future rate reductions. Traders should watch key data releases leading up to the decision, particularly the UK CPI and labor market reports, to gauge the BoE’s stance.

Bank of Japan (BoJ)

Meanwhile, the BoJ faces a different challenge. Japan’s inflation remains slightly above target at 2.7%, and the labor market is holding up relatively well. However, weak retail sales and sluggish PMIs indicate that economic momentum is faltering. With this backdrop, the BoJ is unlikely to raise rates and may instead continue its ultra-loose monetary policy, especially as global central banks shift toward easing. Traders will be watching the BoJ’s inflation outlook closely to assess the likelihood of future monetary policy adjustments.

Market Events and Announcements

Times below are GMT +3.

Monday, September 16, 2024:

No significant event – bank holiday in Japan and China

Tuesday, September 17, 2024:

3:30 PM – CAD CPI m/m: Measures inflation by comparing changes in the price level of consumer goods and services.

3:30 PM – CAD Median CPI y/y: The median CPI indicator helps understand the central inflation trend.

3:30 PM – CAD Trimmed CPI y/y: A version of CPI excluding extreme price movements.

3:30 PM – CAD Core Retail Sales m/m: Excludes automobiles and gives insight into consumer spending.

3:30 PM – CAD Retail Sales m/m: Measures changes in the total value of sales at the retail level.

Wednesday, September 18, 2024:

9:00 AM – GBP CPI y/y: Annual change in the price of goods and services bought by consumers, a key inflation metric for BoE policy.

9:00 PM – USD Federal Funds Rate: Expected decision on the US interest rate, widely anticipated at 5.25%, down from 5.50%.

9:00 PM – USD FOMC Economic Projections: Detailed analysis of future economic trends and growth, inflation, and unemployment forecasts.

9:00 PM – USD FOMC Statement: Provides updates on the Federal Reserve’s monetary policy stance.

9:30 PM – USD FOMC Press Conference: Chairman Jerome Powell discusses the reasoning behind the Fed’s decision and provides forward guidance.

Thursday, September 19, 2024:

1:45 AM – NZD GDP q/q: Measures the total output of New Zealand’s economy, offering insight into economic growth.

4:30 AM – AUD Employment Change: Key labor market data showing changes in the number of employed people.

4:30 AM – AUD Unemployment Rate: Provides insight into Australia’s labor market health, with the previous value at 4.2%.

2:00 PM – GBP Monetary Policy Summary: Provides an in-depth view of the BoE’s stance and outlook on monetary policy.

2:00 PM – GBP MPC Official Bank Rate Votes: The voting pattern reveals insight into the BoE’s stance on monetary policy.

2:00 PM – GBP Official Bank Rate: Expected rate of 5.00% unchanged; BoE’s decision could influence GBP movements.

3:30 PM – USD Unemployment Claims: The number of individuals filing for unemployment insurance for the first time during the past week.

Friday, September 20, 2024:

Tentative – JPY BoJ Policy Rate Decision: The BoJ’s decision on maintaining the ultra-loose monetary policy, potentially keeping rates at -0.25%.

Tentative – JPY BoJ Policy Statement: The BoJ’s stance on monetary policy will be key, as markets expect the bank to hold its ultra-accommodative policy.

Tentative – JPY BoJ Press Conference: The governor will comment on the state of the Japanese economy and monetary policy.

9:00 AM – GBP Retail Sales m/m: Changes in the total value of sales at the retail level, excluding fuel.

3:15 PM – CAD BOC Gov Macklem Speaks: Commentary on the Canadian economy and monetary policy.

3:30 PM – CAD Core Retail Sales m/m: Offers insight into consumer spending trends.

3:30 PM – CAD Retail Sales m/m: Measures changes in overall retail sales.

Chart Insights: Key Charts to Watch

Chart 1: US 10-Year Treasury Yield (Weekly Chart)

The US 10-Year Treasury yield has been under consistent downward pressure, following a clear downtrend since mid-April 2024. Currently hovering near its lowest levels since June 2023, the yield has been heavily influenced by softening inflation data and a more dovish Federal Reserve outlook. A break below the critical support at 3.668% could signal a continuation of the bearish momentum, potentially leading to further downside towards 3.596%, 3.558%, and 3.504%, which are the next key support levels.

Main Scenario:
A further decline in yields is likely if the Federal Reserve continues its dovish stance and weak economic data, particularly related to inflation and labor markets, supports rate cut expectations. This would encourage bond buying and push yields lower.

Alternative Scenario:
In the event of stronger-than-expected US economic data or signs that the Fed may adopt a more hawkish tone, a reversal is possible. In such a case, the yields could push higher, testing the key resistance at 3.934%. A break above this level could drive yields back toward 4.100%, challenging the narrative of a dovish Fed.

Key Levels:

Support: 3.668%, 3.596%, 3.558%, 3.504%

Resistance: 3.934%, 4.100%

Key Drivers:

FOMC Meeting: A dovish tone could push yields lower, while a more hawkish stance may reverse this trend.

Economic Growth: Weaker economic data or signs of a potential recession could drive investors into safe-haven assets like Treasury bonds, pushing yields further down.

Global Demand: Demand for U.S. Treasuries as a safe investment option remains strong, particularly during periods of global uncertainty, which can also lower yields.

Chart 2: GBP/USD (Weekly Chart)

Despite the two weeks of volatile rangebound, the GBP/USD pair has maintained its upward trajectory since early August, bouncing off its 34-week moving average above July’s top. As we approach the BoE and Fed decisions, the pair remains above key support levels, with buyers aiming to retest the July high of 1.32930. As long lower shadow of the weekly candlestick suggests, sustained bullish momentum may push the pair higher.

Main Scenario:
If the BoE holds rates steady while hinting at further rate hikes and the Fed leans towards cutting rates, we could see GBP/USD rise towards the mentioned resistance levels of 1.34437 and 1.36868. The divergence in policy could further support GBP strength.

Alternative Scenario:
Conversely, should UK economic data underperform, particularly in retail sales and employment, or if the BoE turns more dovish, the pair could reverse. A drop below 1.30505 could open the door for further declines, targeting 1.29002. A confirmed trend reversal would only occur with a decisive break below 1.26572 (the August low).

Key Levels:

Support: 1.30505, 1.29002, 1.26572

Resistance: 1.32930, 1.34437, 1.36868

Key Drivers:

BoE Rate Decision: A hawkish tone could push GBP/USD higher, while dovish commentary may favor USD strength.

FOMC Decision: A dovish Fed could support the pound, while any hawkish surprise may cap GBP gains.

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