Markets next week: BoE, SNB, RBA on rate target

Key analysis of the Central Bank

• The Bank of England is likely to pave the way for a rate cut this summer as inflation and the labor market show continued signs of easing
• Markets anticipate another rate cut by the Swiss National Bank
• The RBA will stand firm, expecting further progress in inflation as economic growth slows
• The analysis in this article uses chart patterns and the key support and resistance levels. For more information visit our comprehensive education library

With US CPI and FOMC economic forecasts in the rear view mirror, markets will look ahead to more central bank activity when the Australian, Swiss and UK central banks meet this week to set monetary policy. In addition, the UK and Japanese inflation prints will be examined for different reasons. Japanese officials are hoping for evidence of higher ‘demand pull’ inflation, while Britain is hoping to see improvement (decline) in price pressures after April figures disappointed.

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The Bank of England is likely to pave the way for a rate cut in the summer

The Bank of England (BoE) is likely to keep rates unchanged when they meet next week, but their messages will be eagerly awaited as conditions for an interest rate cut appear on the horizon. In April, inflation fell encouragingly but was unable to match high expectations. The latest jobs report also highlighted some jitters in the labor market with a bunch more claimants (for unemployment benefits) filing in May (50K+).

UK growth remains anemic, with the economy stagnating in April at 0% growth for the month. An obstacle point for the Bank of Albania is inflation, and most importantly inflation of services, which remains a problem. Average earnings also proved to be stable, failing to fall in the three-month period ending in April compared to the previous three months, but this is less of a concern according to the Bank of Albania and their analysis. A lower move in utility inflation would be a step in the right direction.

Cable had a volatile week, driven almost entirely by top US data (CPI, FOMC forecasts). The well-received inflation data on Wednesday and the pair’s subsequent rally retreated hours later with stronger revisions to the inflation outlook. Since then, FX markets have prioritized dovish projections over encouraging inflation data – the opposite of what has been seen in the US stock market as major indices hit new all-time highs. Continued progress in inflation and a weaker BoE could extend the current move lower towards 1.2585 and possibly even the 200 SMA.

GBP/USD Daily chart

Source: TradingView, prepared by Richard Snow

Markets anticipate another 25 basis point cut by the SNB

After surprising markets in March with a 25 basis point cut, the Swiss National Bank (SNB) will meet again next week and potentially cut the policy rate again. Switzerland managed to reduce total inflation to just 1% in March, since then it has been 1.4% but remains very low compared to other developed countries. Markets are factoring in a 72% chance of a rate cut next week.

Market implied rate probabilities

Source: Refinitive, prepared by Richard Snow

A major risk to the market outlook emerged when the SNB Chairman mentioned that the biggest risk to the inflation outlook is a weak Swiss franc. His comments immediately saw the currency strengthen. GBP/CHF approaches 1.1245 with the potential to test the 200 SMA. The blue SMA 50 appears as dynamic resistance.

GBP/CHF daily chart

Source: TradingView, prepared by Richard Snow

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The RBA should hold, but the economy is feeling the pressure of restrictive policy

The RBA has struggled with resurgent inflation, forcing it to hike after it appears to have stalled in 2023. Officials therefore want to be sure inflation is on track before loosening monetary conditions. As such, there is a 96% chance that rates will remain on hold according to rate markets with the potential for just one rate hike later this year in December, but that too has not been forthcoming.

Source: Refinitive, prepared by Richard Snow

The Austrian dollar lost ground in the past week. AUD/USD has mostly fluctuated between 0.6680 and 0.6580 with prices testing the lower bound this week before breaking it. Australian GDP is also due next week, with Q1 estimates suggesting a stagnant start to the year with 0% quarterly growth. AUD/USD could continue to move lower next week due to recent bullish momentum in the US dollar and a complicated growth outlook for Australia.

AUD/USD Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX