Hike, pause, shouldn’t cut

Recent months and weeks have seen central banks around the world increasingly moving towards a data dependent stance. As we noted in the previous edition of our weekly outlook, the last seven days were due to deliver much of the data that central banks were dependent on. Coming up next week then, markets will get a taster of how central banks are viewing many of these developments. Though many expect the RBA to hold rates on Tuesday, we think otherwise. Instead, signs of sticky inflation under the surface in Australia should see the central bank hike against consensus. The Bank of Canada, though, should be done hiking and go on pause, especially following this week’s dire GDP report. If they do hike rates, it could be the second policy blunder under Governor Macklem’s stewardship. The NBP by comparison should also hold rates as we expect, but may not given policymakers dovish tendencies. Whilst inflation has yet to fall below their self imposed trigger for rate cuts of 10%, there remains a risk the MPC suffers a bout of collective amnesia and begin cutting rates nonetheless. Outside central bank dynamics, the stage looks set for yet another chapter of the US outperformance narrative to play out. ISM PMIs will likely confirm once again that whilst other developed markets struggle to eke out growth, the US continues to stand out. If developments continue to play out as expected, then events should see the dollar stay supported once again. 

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Authors: 

Simon Harvey, Head of FX Analysis

Jay Zhao-Murray, FX Market Analyst

María Marcos, FX Market Analyst

Nick Rees, FX Market Analyst

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