Week Ahead in FX (July 18 – 22): ECB Rate Hike And Flash PMIs Lined Up

It’s gonna be another busy week in the forex arena!

Better watch out for these central bank announcements, CPI data, and flash PMIs.

If you’re planning on trading any of these top-tier releases, read up on what market watchers are expecting:

Major Economic Events:

U.K. CPI (July 20, 6:00 am GMT) – First up we’ve got another glimpse into U.K. inflation, which has been rising enough to keep their policymakers on edge.

Another uptick in price pressures is expected for June, with the headline figure projected to advance from 9.1% to 9.3%.

A stronger than expected increase would once again feed into fears of a downturn in consumer spending and ultimately a recession. This could also up the pressure on the BOE to increase borrowing costs in their next meeting.

Canada’s inflation data (July 20, 12:30 pm GMT) – With the BOC recently surprising the markets with a huge interest rate hike last week, traders are keen to find out whether or not the latest round of inflation measures could spur another aggressive tightening move.

Headline CPI likely climbed from 7.7% to 8.3% year-over-year in June while the core reading probably dipped from 6.1% to 5.9%.

BOJ monetary policy statement (July 21) – It will be the BOJ’s turn to announce their policy decision but, unlike most of its peers, the Japanese central bank will likely stand pat.

BOJ officials don’t seem to be alarmed by the surge in price pressures just yet, even welcoming the sharp drop in the yen’s value as it also spurs inflation.

However, there have been strong concerns on consumer inflation and its impact on household spending, so policymakers might have to get creative when it comes to dodging a recession. Some say that the BOJ might drop hints on adjusting its yield curve control policy, possibly keeping a lid on the yen’s decline.

ECB monetary policy statement (July 21, 12:15 pm GMT) – The main event for the week will likely be the ECB decision, as the central bank is widely expected to announce its first rate hike in more than a decade.

It might not be such a huge deal like the Fed’s though, since the increase is only expected to come in at a measly 0.25%. What euro traders are more keen to find out is whether this tightening move is the first of many or just a one-off thing.

Many expect the ECB to outline a roadmap for its rate hikes for the rest of the year, with some even banking on a larger 0.50% hike sometime in September.

Flash PMI readings (July 22) – It’s the third week of the month, so we’ve got the flash PMI reports lined up!

The top eurozone economies will get the ball rolling, with France likely printing another set of declines in its manufacturing (51.4 to 51.1) and services (53.9 to 53.1) PMIs. Germany might also report a slower pace of growth in the manufacturing (52.0 to 50.9) and services (52.4 to 51.4) industry.

In the U.K., the flash manufacturing PMI likely improved from 52.8 to 53.5 to signal a faster pace of expansion while the flash services PMI probably dipped from 54.3 to 53.6.

Lastly, Uncle Sam’s flash manufacturing PMI is expected to have dipped from 52.7 to 52.6 while the services PMI likely fell from 52.7 to 51.6 in July.

Forex Setup of the Week: EUR/JPY

This one has been starting a shallow downtrend on its 4-hour time frame, forming a fresh descending channel and pulling up from the lows.

How much higher can it go?

The Fibonacci retracement tool shows potential resistance levels nearby, with the 50% level right smack in line with the middle of the channel.

A larger correction could reach the 61.8% Fib near the 141.50 minor psychological mark or the channel resistance around the 143.00 handle.

Technical indicators point to a continuation of the slide, as the SMAs just completed a bearish moving average crossover while Stochastic is reflecting overbought conditions.

If any of the Fibs hold as resistance, EUR/JPY could slump back to the lows or even lower. Better watch out for the BOJ and ECB decisions when trading this one!