Week of 4 MAY

Several major central bank meetings captured market attention this week, including those of the Fed, ECB, and BOE. Brent started the week at $101 per barrel as a resolution to the Middle East conflict seemed far away, rising to over $113 by Thursday amid rumours of a potential escalation but sitting below $110 on Friday.

There is a quieter economic calendar for the week ahead, with highlights including the RBA rate decision and US Treasury Refunding estimates ahead of the all-important US Non-Farm Payrolls data.

Week in Review

The week started on a mixed note, as talks to reopen the Strait of Hormuz stalled, and currency markets were in a holding pattern ahead of major central bank meetings. Gold started the week at $4,700 per ounce and trended lower towards $4,550 after reports that US President Donald Trump was considering military action to advance talks with Iran.

The Fed held rates unchanged as was widely anticipated, but the largest number of dissenters since 1992 surprised markets and left a more hawkish impression. The central bank cited inflationary pressures, and average US gasoline prices rose to the highest level in 4 years. However, the ECB's hawkish hold reversed the dollar index's gains after the meeting. After the shared central bank warned that inflation threats have risen, markets began pricing in a "pre-emptive" rate hike as soon as June. Futures suggest as many as three ECB hikes this year.

The BOE also kept policy on hold but introduced ambiguity by outlining three scenarios for the war in Iran and how they could affect the outlook. Governor Andrew Bailey said that in two of those three, the BOE would likely not have to raise rates. In balance, the pound remained stronger than the euro as investors worried that the more hawkish ECB would harm growth in the Eurozone.

Likewise, the BOJ delivered a hawkish hold, with 3 of the 9 members voting to raise rates. However, it wasn't enough to prop up the yen, and USD/JPY weakened below the 160 level after the Fed's surprise hawkishness. However, the exchange rate suddenly corrected by more than 500 pips as all evidence pointed to the BOJ intervening to prop up the currency after officials issued a "final warning" to the market a few hours earlier.

Earnings season propped up risk appetite with US markets scoring new record highs after most major tech companies posted solid earnings and reassured traders of continued demand for AI-based tech.

Biggest Market Movers

• The yen posted its largest gain since 2022 on Thursday, widely considered an intervention by the BOJ, after USD/JPY crossed above 160 and fell to as low as 156 in a matter of hours.
• The Nasdaq posted consecutive record highs, buoyed by earnings from major tech companies on Wednesday and Thursday.
• Crude prices broke above $110 per barrel, the highest since the start of the war in the Middle East, as progress towards reopening the Strait of Hormuz stalled.
• CAD was among the better-performing currencies amid dollar weakness, buoyed by higher crude prices.

Top Events in the Week Ahead

A quieter economic calendar in the coming week could bring the focus back to the Middle East after Trump was reportedly briefed on options to resume military strikes to break the stalled negotiations with Iran. Markets might have a slow start on Monday, with the UK, China and Japan away for a holiday while European markets catch up after being closed on Friday. The focus of the week will likely be on US labour data after prior months showed wide variations, and traders are looking for a trend that could forecast Fed action later in the year.

US Labour Market Expected to Normalise

After March's blowout NFP report, which saw 186K jobs added, economists are now forecasting April to return to 83K, around the level maintained over the last year. If that were the case, concern over a weak jobs market might resume, weighing on Fed expectations. But if the US posts another strong NFP number, it could mean March wasn't an outlier and raise the odds of a Fed hike and potentially send gold prices towards $4350. Meanwhile, the unemployment rate is anticipated to stay unchanged at 4.3%.

RBA to Hike Again

Analysts expect the RBA to hike rates for a third consecutive time as the island nation faces high inflation and a still-resilient economy. Australia was already facing rising consumer prices, particularly rising housing prices, even before the bump in energy costs, leaving the RBA little room to "look through" the circumstances. The focus will be on whether the RBA suggests it will pause at the next meeting after erasing all of last year's cuts. As the Aussie retests 0.7200, a breakout could push AUDUSD to 4-year highs or fall back under 0.7100.

US Treasury to Maintain Borrowing

On Monday, the US Treasury will publish its quarterly borrowing estimates, with economists expecting a similar amount in Q2 as in Q1 and keeping around $815 billion in cash on hand. The data has drawn increased scrutiny amid high US debt and the White House's drive to lower interest rates. An unexpected increase in borrowing could push up US yields and the dollar higher, weighing on EURUSD as it attempts to distance itself from the 1.1650 support.

Other Events and Earnings

Monday has US factory orders. US JOLTS job openings data comes out on Tuesday. Wednesday includes Canada's Ivey PMI. For Thursday, Australia's trade balance is scheduled. Friday sees Germany's trade balance released.

Earnings season is past its peak this week, with a myriad of names reporting, including Palantir, AMD, Arista, Arm, Walt Disney, Uber, Shell, McDonald's, Gilead and Enbridge.