EUROPEAN SESSION
In the European session, we don’t have anything on the agenda so the price action will likely remain rangebound heading into the US CPI release. The risk sentiment is mixed but not negative despite some fresh escalation between US and Iran.
The limited attacks and retaliations continue to suggest that there’s no intention to go back to a full-fledged war. However, these episodes are almost certainly going to extend further the negotiating stalemate and therefore the Strait of Hormuz closure.
AMERICAN SESSION
In the American session, all eyes will be on the US CPI report even though we have also the Bank of Canada rate decision. Headline CPI Y/Y is expected at 4.2% vs 3.8% prior, while the M/M figure is seen at 0.5% vs 0.6% prior. The Core CPI Y/Y is expected at 2.9% vs 2.8% prior, while the M/M metric is seen at 0.3% vs 0.4% prior.
Following the NFP report, the market fully priced in a rate hike by year-end with the total tightening standing at 25 bps right now. We can now expect the Fed to drop the easing bias at the upcoming meeting, but the focus will be mostly on the dot plot and forward guidance. Even though a rate hike is now fully priced in, if the Fed endorses the market pricing, it will effectively confirm that the bias has now shifted to tightening.
The question for markets is now when and how many rate hikes the Fed might deliver by year-end. There’s just a 38% probability of a rate hike in September, so stronger data or a more hawkish than expected FOMC decision next week are going to bring expectations for a rate hike forward. Conversely, if the data was to surprise to the downside, we can expect some short-term relief in the hawkish Fed fears.
The Bank of Canada is widely expected to keep interest rates unchanged at 2.25%. There won’t be a press conference nor the release of new economic projections at this meeting. The BoC is highly likely to keep a neutral stance given the soft Canadian data and risk of higher inflation in the coming months due to the global energy price shock. The Trimmed-Mean CPI Y/Y fell to 2.0% in April, so that’s right at the BoC 1-3% mid-point target. The market is pricing in an 87% chance of a rate hike by year-end
