Important Week Ahead for Financial Markets
Volatility is likely to be on the rise this week as the Reserve Bank of Australia (RBA) and Bank of England (BOE) are due to announce their monetary policy decisions. Although these are key for markets, the focus will be on the Non-Farm Payrolls (NFP) release and the Unemployment Rate in the United States on Friday.
On Tuesday, the RBA announces its decision on the Australian cash rate. Expectations are that it will keep it to 0.25%, a record low, in order to stimulate the economic environment. As always, the focus will be on the RBA Rate Statement that accompanies the decision, and that creates heightened volatility on the AUD pairs.
Speaking of the AUD, it is one of the top-performing currencies against the USD after the Fed opened the USD swap lines to better react to the coronavirus pandemic. The AUDUSD pair rose over a thousand pips – from 0.55 to 0.65 – in a little over a month, following the US stock market performance closely.
Bank of England Decisions – A Non-Event for the British Pound
On Thursday, the BOE is expected to keep its current monetary policy intact as well as the size of its asset purchase facility. BOE is one of the major central banks working in close cooperation with the Fed to provide access to USD funding for businesses when needed.
It reacted quickly to the current economic crisis by providing liquidity, cutting rates, and increasing the asset purchase facility. The GBP, in consequence, rose against the USD from a 1.15 low March to well over 1.25 – a similar move with the AUDUSD.
Double-Digit Unemployment Rate
In both examples, AUD and GBP, the denominator is the USD. The world’s reserve currency is in strong demand in times of crisis, as investors look for shelter in its safe-haven characteristics.
The lower USD is responsible for the bounce in the US equity markets too. DJIA (Dow Jones Industrial Average) and the S&P500 just completed one of the best months in history, and a lower currency did help.
However as investors are cheering recent performance of markets, the NFP on Friday will likely be a cold shower. The projected double-digit Unemployment Rate is likely reality, and the only question is how much it will rise and for how long it will stay there?
The Fed’s financial assistance and governmental support cannot continue forever, without major damages. Even if the US economy reopens, it will do so gradually, in other words, people will have a hard time finding new jobs or even getting their old job back. Meaning the pain of the pandemic is still yet to be truly felt.
Friday’s release will tell us just how bad things are on the other side of the Atlantic. Those trading this week should expect higher volatility surrounding the release, as investors revise their expectations.