FX Week Ahead - BoE meeting and China GDP could signal fresh stimulus

The Bank of England will come in focus next week as it holds its first policy meeting following the shock referendum outcome when Britons voted to leave the EU. The Chinese economy will also come under the limelight once again as a flurry of data is released, including GDP growth figures for the second quarter. US inflation and retail sales data will also be watched.

China GDP to slow further as exports continue to struggle

China will start the week on Sunday with the release of the latest inflation figures. Annual CPI in June is forecast to dip to 1.8% from 2.0% in May and is expected to be the first among a series of weak data out of the country over the next seven days. Trade data will follow on Wednesday where exports are forecast to post a 4.1% annual decline in June, unchanged from May. Imports are not expected to show any rebound either as they’re forecast to fall at a faster pace, by 5.0% in June.

Friday will be a busy day with the industrial production, retail sales and business spending figures all due. Industrial output is expected to slow slightly from 6.0% to 5.9% year-on-year in June, and fixed asset investment is forecast to ease from 9.6% to 9.4% y/y. Retail sales growth is expected to hold steady at 10.0% annually.

But the big focus will likely be on the second quarter GDP figures, which are out on Saturday. China’s economy is forecast to grow by 6.6% y/y in the second quarter as it continues to steadily run out of steam. Unless there’s any positive surprises, next week’s data will likely raise expectations of further action by Chinese authorities over the coming months to stimulate the economy.

UK could see first rate cut since 2009

The Bank of England’s Monetary Policy Committee will meet for the first time on Thursday since the June 23 referendum when financial markets were rocked by the shock result to leave the EU. BoE Governor Mark Carney has been busy since the vote as he’s tried to reassure markets that the Bank is taking the necessary steps to ensure the smooth running of the UK’s banking and financial system. Carney has already told markets to expect some monetary easing in the summer. However, analysts are split whether an expected rate cut, which would be the first change in the Bank’s base rate since March 2009, will come in July or August.

If the MPC decides to leave rates on hold next week, then an August cut will become an almost certainty and could push the pound to fresh record lows against the dollar. Also to watch is the hearing by members of the BoE’s Financial Policy Committee before Parliament’s Treasury Committee on Tuesday where the banking sector, whose shares have plummeted since Brexit, will come into focus.

Quiet week for the Eurozone

It will be a light calendar week for the euro area next week with only industrial output and final inflation figures due. Eurozone industrial production is expected to post a 0.7% month-on-month decline in May, after rising by 1.1% the previous month. This could point to weaker growth in Q2 but the European Central Bank will at least be able to take comfort from the fact that deflationary pressures across the euro are receding. The final inflation reading for June is expected to confirm annual CPI at 0.1%, but the core rate is forecast to be revised higher from 0.8% to 0.9%.

Australian jobs growth to slow slightly

The Australian dollar has been one of the better performing currencies since Brexit as declining government bond yields globally have made Australia one of the few advanced economies offering significantly positive yields. Its economy continues to remain fairly resilient to global headwinds but the Reserve Bank of Australia has expressed some concern about the mixed labour market of late. Employment is expected to rise by 10k in June when released on Thursday, down from 17.9k in May. The unemployment rate is expected to rise slightly from 5.7% to 5.8%. A negative reading could fuel expectations of another rate cut by the RBA, especially given the political uncertainty created from the recent federal election.

US retail sales and inflation to be eyed

Friday will be a data-packed day for the US with all the week’s key indicators released the same day. Starting with inflation, annual CPI is expected to increase from 1% to 1.1% in June, while core inflation is forecast to edge up by 0.1% to 2.3%. This could be a further sign that price growth in the United States is finally starting to creep higher, albeit very gradually.

Retail sales are expected to ease in June, to 0.1% m/m from 0.5% in May. There could be further sign of a softening in consumer spending in the United States as the University of Michigan consumer sentiment index is forecast to weaken slightly from 93.5 in June to 93.0 in July in the preliminary reading.

Finally, industrial production could see a small rebound in June, with output forecast to rise by 0.2% m/m after dropping by 0.4% the prior month. Next week’s data is unlikely to have a major impact on the dollar as no action is expected from the Fed in the coming months given the market uncertainty created by Britain’s exit vote to leave the EU.