Top 3 economic events to move financial markets in the week ahead

The week ahead is full of important economic events poised to move financial markets. Three of them, in particular, look extremely interesting: the interest rate decision in Australia, the ECB Meeting, and the CPI in the United States.

RBA Rate Statement

Most of the European banks are on holiday tomorrow. Therefore, the market participants will focus on the North American session on Monday.

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However, starting with Tuesday, volatility will pick up as one of the two central banks deciding their policies is due – the Reserve Bank of Australia (RBA).

The Australian economy benefited from the low-interest-rate environment set by the RBA during the COVID-19 pandemic. But now that economy is growing again and, more importantly, inflation is well above the RBA’s target, the central bank is raising the cash rate.

The cash rate is the interest rate on unsecured overnight loans between Australian banks. It reached its lowest level in decades during the COVID-19 pandemic, but now the RBA has reversed the course.

Inflation in Australia reached 5.1% YoY.  While not so high as in other parts of the world (e.g., the United States, the Euro area), it is way above the RBA’s target.

Hence, the central bank is expected to hike the cash rate again, from the current 0.35% to 0.75%.

Ahead of this week’s decision, the Australian dollar (AUD) traded with a bid tone across the FX dashboard, gaining against peers such as the Japanese yen or the US dollar.

ECB Meeting

The RBA’s decision may be important for AUD traders, but the ECB Meeting on Thursday is even more interesting. For the first time ever, the European Central Bank (ECB) faces its toughest inflation test since the common currency’s introduction.

Never in the euro’s history has inflation been so high as it is now – 8.1% YoY. Yet, the market expects the ECB to stay on hold next Thursday and act only in July.

Can it do that, though? Can it afford another six weeks with energy prices galloping higher and inflation running off the charts?

May 2022 CPI Report

You may have already noted that inflation is a problem everywhere – from Australia to Europe and the United States.

The US May CPI report is due on Friday, and all eyes are on the core CPI inflation. This is because it excludes energy and food prices, which, as seen below, are a huge driver in the rising price of goods and services in the United States.

Some market participants believe that inflation has already peaked in the United States. If that is the case, we will find out on Friday.

Most certainly, it would be welcomed news for markets. But it won’t stop the Fed from hiking the funds rate at the next couple of meetings by 100bp in total.

All in all, this is a week when attention is on inflation and how central banks respond to it. So don’t expect anything this week to be easy to trade – just the opposite. Surprises are likely, especially on Thursday.