In this article, we will discuss this week’s most market-moving risk events. This will include a complete preview of three UK events which are likely to influence and set the tone for GBP.
The market’s focus last week revolved around US yields and concerns over Italy.
According to Reuters, prospects of Italy further increasing its debt places it on a direct collision course with the EU. This is a result of Italy’s Northern League and 5-Star Movement pledging to increase spending in a deal to form a new coalition government.
The reports have weighed on EUR throughout the week along with other EU markets.
Regarding US Yields, the US 10yr continued to strengthen to hit 3.128%, supporting USD across the board. CNBC stated this places the US 10yr yield at levels not seen since 2011.
Interestingly, ING believes USD’s recent rally could be coming to an end. They see EURUSD bottoming and range trading around the 1.1900 level.
This week, the focus will likely shift back to GBP with multiple UK releases. Although, USD and EUR will also be in focus with the FOMC and ECB releasing their May meeting minutes.
This week’s key UK data releases will be:
- The BoE’s quarterly inflation report hearing. This will provide further insight into BoE member expectations for future monetary policy.
- UK inflation report (CPI) for April. Inflation remains a key influence on monetary policy and hence GBP’s fundamental outlook.
- UK Second Estimate GDP for Q1. This will be particularly important given the market’s disappointment in the Preliminary estimate.
Tuesday, May 22nd
GBP – BoE Inflation Report Hearings
The first high conviction event of the week will be the BoE’s Inflation Report Hearing. This is a quarterly event and involves the BoE Governor and several other MPC members.
During these hearings, the selected MPC members testify before Parliament’s Treasury Committee. This gives markets a chance to evaluate MPC member views and rate hike expectations.
The hearings last several hours, creating volatility as markets react to members’ comments. Especially if those comments contrast with their usual stance or influence rate hike expectations.
Any particularly hawkish comments could result in GBP strength. Especially if they come from a known dove such as BoE’s Cunliffe or Ramsden.
Conversely, any particularly dovish comments could weigh on interest rate expectations and GBP. Especially if they come from a known hawk.
The most hawkish BoE members are McCaffery and Saunders who voted for a hike at the BoE’s May meeting.
Wednesday, May 23rd
GBP – Consumer Price Index
Inflation in the UK is one of the most influential factors for monetary policy. Therefore, CPI plays a crucial role in inflation expectations and GBP’s fundamental outlook.
According to the Office for National Statistics, CPI in March slowed to a 12-month low of 2.5% Y/ Y. Core CPI Y/Y also printed at its lowest level since March 2017 at 2.3%.
For April’s inflation report, the market expects CPI Y/Y to remain at 2.5% Y/ Y. Although the market expects Core CPI Y/Y to slow further to 2.2%.
The market expects both CPI M/M and Core CPI M/M to print at 0.5%. This compares to last month’s headline of 0.1% and core of 0.2%.
Any significant deviation in any of these four measures has the potential to move GBP. Potentially resulting in a high conviction trading opportunity.
If April’s inflation report is disappointing, GBP will likely weaken across the board. Conversely, if positive, GBP will likely strengthen across the board.
Given the UK’s run of disappointing data in April, the higher conviction trade is likely on a miss. Of course, if the data prints as expected, there will likely be no clear opportunity.
USD – FOMC Meeting Minutes
These minutes will relate to the FOMC’s May 2nd meeting where the Fed kept rates unchanged at 1.50<1.75%. The market considered the meeting to be slightly dovish, weighing on USD.
According to Bloomberg, the highlight was the Fed signalling a willingness to allow inflation exceed their 2% target. This became apparent by the Fed adding a reference to the ‘symmetric’ nature of their target.
The market will be evaluating the Fed’s May Minutes for further clarity on the change in language. If the minutes further support a more relaxed approach to inflation, USD will weaken.
Of course, the minutes could convey a more hawkish tone than the initial statement. In this case, USD will likely strengthen.
If the minutes provide no additional insight, we would expect yields to remain the primary driver of USD. If the 10yr continues it’s recent rally USD will likely remain supported.
If, however, yields pare their recent strength, USD will likely weaken. We would expect this to be particularly notable if the US 10yr broke back below 3%.
Thursday, May 24th
GBP – UK Retail Sales
Although the market classes Retail Sales as tier one data, this is not on the same level as CPI. With that said, if both CPI and Retail Sales deviate in the same direction, it could make for a great opportunity.
This is because a deviation on Retail Sales would further exacerbate GBP sentiment. Therefore, if both are positive, you could look to buy GBP, and if both are negative, sell GBP.
Conversely, if CPI and Retail Sales contrast, you could consider fading any reaction. This because we would expect CPI to remain the more influential event.
EUR – ECB Meeting Minutes
These ECB Minutes will relate to their April 26 meeting where the ECB kept policy unchanged.
According to FocusEconomics , the meeting was uneventful with no surprises or changes in forward guidance from the ECB.
A clear focus for the market will be any insight into the ECB’s view of the economy’s recent performance. This is because recent data has seen some analysts question future policy expectations.
A lack of concern over EU economic data will likely be EUR positive. However, if the minutes suggest there are growing concerns, EUR could weaken.
If the minutes fail to provide any additional insights, the bias for EUR will likely be to the downside. This is assuming Italian concerns continue to weigh on EUR sentiment.
Friday, May 25
GBP – Second Estimate Gross Domestic Product
The market expects Second Estimate GDP to remain unrevised at 1.2% Y/Y and 0.1% Q/ Q. Therefore, any revision could provide a clear trading opportunity.
This is because the market’s disappointment in the first estimate saw a May rate hike taken off of the table. This means any strong upwards revision could bring rate hike expectations forward.
This would likely support GBP and potentially even conclude it’s recent sell-off.
Of course, a downward revision and miss on expectations would be particularly detrimental. GBP would likely weaken across the board, and its recent sell-off continue.
It’s worth noting an ideal trading setup could present itself if all this week’s data deviate in the same direction.
If all data is positive, GBP will likely see a recovery from its recent sell-off and bearish sentiment. Conversely, its bearish sentiment and sell-off will likely exacerbate if all data disappoints.
If, however, UK data prints mixed, GBP could see an overall volatile week with no clear bias.
With multiple key UK events this week, GBP will no doubt be a clear market focus. Any changes to rate hike expectations could provide both intraday and longer-term opportunities.
We would consider all of these events significant enough to trade out off. However, if a clear bias develops leading into an event, you could trade into it.
The goal of this article is to help you improve your understanding and ability to trade risk events. If you would like to learn more about risk event trading, please type your question in the comments below.