As the Federal Open Market Committee (FOMC) meeting approaches in May, all eyes are on the decision that will be made regarding the Fed funds target range, which has been stagnant at 5.25%-5.50% for the past six meetings. Despite inflation persisting above the Fed’s 2.0% target, the Fed is unlikely to make any changes to its policy at this week’s meeting. With robust employment growth in the US, there is currently no justification for easing policy just yet. However, investors have started to reduce their rate cut bets for the year, with 36bps of easing priced in, indicating a cautious approach to potential future adjustments.
While the FOMC meeting is garnering attention, the focus also shifts towards the European Central Bank (ECB) and the Bank of England (BoE), which have both experienced a recent hawkish repricing. Market expectations suggest a total of 71bps of easing for the ECB this year and 44bps for the BoE. Interestingly, the ECB is projected to cut rates ahead of both the Fed and BoE, with June’s policy meeting potentially seeing a -21bps adjustment. On the other hand, the BoE might consider a rate cut in August. Investors are closely monitoring the upcoming euro area flash inflation data for April and Q1 GDP numbers, as they could influence market sentiment and trading strategies.
Economists’ estimates indicate that headline YoY inflation in the euro area is expected to remain unchanged at 2.4%, showing a slight decrease from previous months. Additionally, core inflation is projected to cool slightly to 2.8% in the twelve months to April. GDP figures are anticipated to stay relatively flat both YoY and QoQ, highlighting the ongoing economic stability in the region. However, if the inflation data falls below consensus, it could open up opportunities for EUR bears to capitalize on a potential market shift. The EUR/USD currency pair is already showing signs of weakness, with a recent retreat from a key resistance level, raising concerns about a possible decline to year-to-date lows.
In addition to the global economic developments, this week will also see a flurry of US jobs data releases. The ADP employment numbers on Wednesday, although not the most reliable indicator, have the potential to move the markets if significant deviations are observed. Moreover, the JOLTs number and the employment sub-index from the ISM manufacturing data will provide further insights into the state of the US labor market. As investors brace for potential shifts in monetary policies and economic indicators, the week ahead promises to be pivotal in shaping market sentiments and trading strategies.