Another super week! U.S. CPI and Federal Reserve meeting minutes "dance" together, and the three major central banks' resolutions are coming

Last week, the market fluctuated fiercely, with the release of the non-farm payrolls report, tensions in the Middle East, frequent comments from Federal Reserve officials, rising gold prices, the U.S. Dow Jones Index's worst performance of the year, and continued pressure on the U.S. dollar. Looking ahead to this week, the European Central Bank, the Bank of Canada and the Federal Reserve Bank of New Zealand will release interest rate decisions, in which the European Central Bank may hint that it will cut interest rates in June, while the trend of the US dollar will be affected by US CPI data and Federal Reserve meeting minutes.

US CPI and Federal Reserve Minutes

This week’s focus will be on the CPI inflation data released on Wednesday (April 10) and the minutes of the Federal Reserve’s latest meeting. Inflation is expected to rise again, but core inflation is expected to fall. The minutes will cover FOMC officials' discussion of economic growth and inflation expectations and, while unlikely to contain breakthrough information, will provide market insights.

CPI in March will rise to 3.4% from the previous 3.2%. However, core inflation is expected to fall to 3.7%. Since the core data excludes the impact of energy prices, the difference likely reflects higher oil prices during the month.

This will be a mixed report for the Fed. The decline in core inflation would suggest that broader disinflationary trends are continuing, even as rising energy prices keep headline inflation elevated.

Meanwhile, the minutes will cover the March meeting, when FOMC officials raised their forecasts for economic growth and inflation but still expected three rate cuts this year. It will be interesting to see the discussions behind the scenes. Still, the minutes released this time are unlikely to contain any groundbreaking information, as most officials have made multiple appearances since the meeting.

As for the U.S. dollar, it was volatile last week, falling after a disappointing U.S. services sector survey from the Institute for Supply Management (ISM), but then recovering on the back of risk aversion over concerns about an Iranian attack on Israel.

Overall, U.S. economic fundamentals appear to be stronger than most regions. For example, U.S. GDP growth is expected to reach 2.5% this quarter, according to the Atlanta Fed. The overall outlook for the dollar therefore appears positive, although sustained gains for the reserve currency may require more signs of weakness in foreign economies or a risk-off climate to spur demand for safe-haven assets.

Canada and New Zealand Interest Rate Decisions

The Reserve Bank of New Zealand will also announce an interest rate decision on Wednesday. The local currency has been in trouble this year, depreciating more than 4% against the US dollar. New Zealand's economy slipped into a mild technical recession late last year, weighing on consumer and business confidence. But inflation remains high, so markets don't expect the RBNZ to take any action when it meets on Wednesday.

A sustained rebound for the New Zealand dollar may require a meaningful economic recovery in the Asian powerhouse, boosting demand for the country's commodity exports.

Although New Zealand's economy has slipped into a double-dip recession, the Reserve Bank of New Zealand is likely to counter investor expectations for a rate cut this week. The Reserve Bank of New Zealand will keep the official cash rate unchanged at 5.5% for the sixth consecutive time on Wednesday, according to a Bloomberg survey of 15 economists. They expect policymakers to emphasize the need to keep interest rates capped for an extended period to curb inflation. Westpac chief New Zealand economist Kelly Eckhold said the market had taken a more aggressive view on the timing and extent of the central bank's interest rate cuts. But this time, those expectations are about to take a hit. Most economists expect the RBNZ to cut interest rates for the first time in the fourth quarter, although some think it will be as early as August. Westpac and ANZ don't expect to start cutting interest rates until early 2025.

The Bank of Canada will also hold a meeting on Wednesday, and with core inflation falling steadily, the market sees a 15% chance of an immediate interest rate cut. Massive population growth has helped ease labor market conditions and ease concerns about wage-induced inflation. The negative side is the housing shortage, which keeps housing inflation high.

As a result, the Bank of Canada is unlikely to cut interest rates at this meeting, although it may provide a clearer signal that rate cuts will occur this summer. The Canadian dollar will also be boosted by oil prices, with any escalation in the Middle East likely to benefit oil-exporting currencies.

ECB interest rate decision

The euro zone economy has struggled over the past year, with a slowdown in global trade leading to a drop in export demand, German manufacturing shrinking, and economic growth almost stagnating. While this helped ease inflationary pressures, inflation fell to 2.4% in March, prompting the European Central Bank to consider cutting interest rates. Expectations that a rate cut may be implemented in June have spread in currency markets. Therefore, the European Central Bank may use this week's meeting as a platform to preview interest rate cuts and emphasize that interest rate cuts will help reduce the risk of economic recession.

The European Central Bank is likely to use Thursday's meeting as a springboard to prepare for a summer rate cut. Lagarde is likely to highlight progress on inflation and argue that cutting rates as quickly as possible will help minimize the risk of a recession.

As for the euro, its bleak economic fundamentals paint a negative picture. One reason the euro has been so resilient over the past year is the collapse in natural gas prices, which has benefited the euro through trade channels. The upbeat tone in the stock market also helped, as it weighed on the safe-haven dollar.

The euro has therefore been able to survive not because of economic performance but because of developments in other financial markets. This is a double-edged sword, as it means any change in these trends could deprive the euro of an important pillar of support.

In other words, the euro needs low oil prices and rising stock markets to stay afloat. Otherwise, traders may start focusing on weak growth prospects and interest rate cuts.

other

Pay attention to the New York Fed's 1-year inflation forecast on Monday, the EIA's monthly short-term energy outlook report on Tuesday, China's March CPI data, U.S. March PPI data and changes in initial jobless claims, and OPEC crude oil market monthly report on Thursday. Pay attention to Chinese trade data, European CPI data, US import price index in March and the initial value of the University of Michigan consumer confidence index in April.

In terms of events, focus on news related to the Russia-Ukraine conflict and news related to the geopolitical situation in the Middle East.