USD: Fed watch and Friday

Retail sales and CPI inflation on Friday will be the big-ticket items for the US calendar this week. Both metrics are expected to pick up in April after poor performance in the first quarter. If they come in line with expectations or even surpass them, this will confirm the Fed’s assertion that weaker data in the first three months of the year were indeed plagued by “transitory” factors rather than systemic weakness. A large miss may jeopardize expectations for a rate hike in June, making Fed speakers this week a focal point.

Cleveland Fed President Loretta Mester spoke Monday morning, saying “we cannot overreact to transitory movements in incoming data,” supporting the “transitory” argument. Mester held that the Federal Reserve’s employment target had been met and that inflation isn’t far behind. She also supported trimming the Fed’s $4.5 trillion-dollar balance sheet this year, echoing the sentiment many of her colleagues have expressed. St Louis Fed President James Bullard also advocates trimming the balance sheet this year. The Taper Tantrum that some fear would repeat itself when the Fed eventually moves to reduce the balance sheet was caused by communication problems from the Fed, Bullard said Monday – an error that they are clearly trying to correct. Wednesday we will hear from voting members Eric Rosengren and Robert Kaplan, Thursday is Bill Dudley and Charles Evans.

EUR: En Marche! to parliament

As predicted, Emmanuel Macron won French elections over the weekend, but the moves we’ve seen in euro have been anything but predictable. After an initial bounce above 1.10 failed to gain traction, the euro fell to the low 1.09s against the USD. Investors will look to see whether Macron can push through and gain a parliamentary majority in next month’s elections. Macron’s first challenge as president may well define the rest of his term, something the young leader is keenly aware of. His politically centrist movement En Marche! was formed just twelve months ago, and currently holds no representation in the legislature. While Macron may appoint a prime minister immediately, parliament will have the authority to name a new PM if his party does not gain a majority.

On the calendar we have German trade figures Tuesday and France’s Wednesday, GDP growth figures from the euro’s largest economy will set us up for the weekend early Friday. From the European Central bank, look out for President Mario Draghi and VP Constâncio’s speeches Wednesday, plus Chief Economist Praet and the ECB’s economic bulletin Thursday.

GBP: Will Carney change his tune?

Super Thursday crowns an otherwise quiet week for the pound. The Bank of England will meet to announce interest rates and broader monetary policy, and while investors are not expecting the BoE to change the benchmark 0.25% they’ve held since just after Brexit, the wheels are turning. Some think that the BoE’s decision to cut interest rates post-Brexit was premature as the UK economy remains more resilient than some of the nay-sayers predicted. Kristin Forbes, a member of the Monetary Policy Committee, dissented at the last meeting and called for a rate hike. Recently inducted MPC member Michael Saunders hinted that he might side with her in April. But while some may drift towards hikes, Governor Carney has been steadfast in his ‘wait-and-see’ approach and will be watched closely for any changes in tone or outlook.

CAD: Oil keeping a lid on it

The Canadian dollar is off to a rough start this week after housing starts fell more than expected. Further pressure on oil prices also weighing on the loonie. After erasing all gains from the production cuts announced in November, OPEC sources said that they are considering extending the deal to curb output, but oil only saw a brief bounce. Investors remain skeptical that their cuts will be effective in addressing the global supply glut. US producers continue to increase their output, fueling these concerns. Last week US drillers added oil rigs for a 16th consecutive week.

Little in the way of domestic data will leave CAD open to peripheral drivers such as oil prices and headlines or new developments on NAFTA renegotiations.

JPY: Downside being eyed

Macron’s win in France is pushing investors towards riskier assets, weakening the Japanese yen. As investors breathe a little easier with the French elections behind them, we could see the yen weaken further as risk sentiment improves. Japan’s trade balance for March comes out late Wednesday and will be interesting to watch after the wildly erratic readings that missed expectations in January and February.

AUD: Risk trades not playing well with AUD

While the increased risk appetite following the French elections would usually shed an optimistic light on Aussie dollar, Monday morning proved to be much choppier than one might have expected, leaving AUD on the backfoot. After taking gains from the highest reading of NAB business confidence in over seven years, disappointment in domestic housing data and Chinese trade figures pushed AUD lower. Building permits in Australia fell -13.4% in March, below market expectations.

Tuesday’s retail sales and the budget will be watched, but otherwise commodity prices and risk appetite could easily dictate the Aussie dollar’s movement later in the week.