This Week: Ultra-hawkish Fed may exert more pain on FX world, global stocks

Watch out for major central banks with pivotal decisions alongside these major data releases and economic events in the coming days:

Monday, 2 May

• AUD: Australia April inflation gauge
• EUR: Eurozone April economic confidence
• USD: US April ISM manufacturing

Tuesday, 3 May

• AUD: Reserve Bank of Australia policy decision
• BNP Paribas Q1 earnings
• GBP: UK April manufacturing PMI
• EUR: Eurozone March unemployment and PPI
• Pfizer Q1 earnings
• Marathon Petroleum Q1 earnings
• Airbnb Q1 earnings
• Starbucks Q1 earnings

Wednesday, 4 May

• AUD: Australia March retail sales
• EUR: Germany March external trade and Eurozone March retail sales
• Moderna Q1 earnings
• US crude oil: EIA inventories data
• USD: Fed policy decision
• Uber Q1 earnings

Thursday, 5 May

• AUD: Australia March external trade
• CNH: China April Caixin composite and services PMI
• Brent: OPEC+ meeting
• EUR: Germany March factory orders
• GBP: Bank of England policy decision
• USD: US weekly initial jobless claims and 1Q GDP

Friday, 6 May

• USD: US April nonfarm payrolls
• CAD: Canada April unemployment rate

 

"The primary focus for global financial markets this week will be on the US Federal Reserve."

It’s widely expected that the Fed will hike interest rates by 50 basis points and announce when it will start shrinking its US$9 trillion balance sheet – anything less would be a surprise. Also, given the forward-looking nature of the markets, investors and traders will be eager to find out if the Fed will agree with expectations for a 75-basis point hike at the mid-June FOMC meeting.

If Fed Chair Jerome Powell continues to sound ultra-hawkish, that could see the US dollar climbing even higher, at the expense of the rest of the FX world. If Powell and his FOMC colleagues pushes back on such aggressive forecasts, that could lead to some unwinding of the dollar’s gains of late.

 

An ultra-hawkish Fed is also expected to heap more pain on equities worldwide, as global central banks may be forced to hike rates in tandem with the US central bank, making borrowing costs more expensive for companies around the world.

Global stocks have already fallen by more than 8% in April, with the S&P 500 declining by 8.8% and the tech-heavy Nasdaq 100 sinking by 13.4% last month alone.

 

US jobs report to be interpreted for Fed policy clues

Economists are forecasting that 390,000 jobs were added in the world’s largest economy in April, while the US unemployment rate is set to move lower to 3.5% to match its pre-pandemic low.

Although markets are still very much focused on inflation data, the incoming US nonfarm payrolls report could also determine how much the Fed can hike interest rates.

A lower unemployment rate and still-robust hiring in the US should give Fed officials the green light to hike rates even higher on the presumption that the economy (and the jobs market) would still be able to withstand more rate hikes.

RBA, BOE also in action this week

Elsewhere in the G10 world, the Reserve Bank of Australia and the Bank of England are also expected to raise their respective benchmark rates this week. Perhaps more crucially for markets, it’s what these central banks say about their future policy moves that could inject more volatility into their respective currencies.

If either the RBA or the BOE signal that either would press ahead with more rate hike to quell red-hot inflation, that could translate into more currency strength (perhaps less so against the US dollar than against its other peers).

However, it is suspected that the BOE may have to ease up on its plans to tighten policy for fear of breaking its own economy – such commentary should translate into more Sterling weakness.