Political developments and FOMC minutes will play key role for EUR/USD this week
The Fed will release the minutes of the 3 May FOMC meeting, when the committee decided to leave rates unchanged but signaled that the outlook for gradual policy normalization remains intact, which most likely includes another rate hike in June.
In addition, the minutes should highlight that, while the committee discussed the weaker U.S. first-quarter numbers (GDP and employment), it concluded that the underlying momentum in the economy has remained solid.
Moreover, we expect that the FOMC used the most recent meeting to discuss details about when and how to start shrinking the Fed’s large balance sheet. According to recent speeches by Fed officials, notably Vice Chair William Dudley, the Fed will “later this year or next year” begin to gradually decide to normalize its balance sheet. This should also be the key message from the minutes. Additional emphasis will be put on the attempt to minimize any market disruption from a balance-sheet reduction.
Markets have become more concerned about the latest political developments in the U.S. and their implication for the US Administration’s policy agenda, while recent electoral results indicate that Europe appears more united than investors had imagined. European fundamentals are also improving. We expect Eurozone PMI surveys for May on Tuesday to remain high, helping the euro to consolidate its recent gains above 1.1100.
USD/CAD investors are focused on BoC and OPEC
The BoC will likely leave its policy stance unchanged at the upcoming meeting. With oil prices remaining weaker than initially expected and potential negative changes in Canada’s trade policy with the US, the uncertainty surrounding economic developments in Canada remains high and the central bank is looking for further signs that the Canadian growth path is sustainable, while a rate cut is not on the table.
On 25 May, OPEC will meet in Vienna to discuss a six-month extension of the decision of 27 November 2016 to cut oil production by 1.8m barrels per day (together with key non-OPEC countries) in order to restore the global-oil supply-and-demand balance and to reduce the global stock overhang. Although year-to-date compliance with production cuts remains robust at 96%, rising production from the US and other countries has limited the effect of the OPEC decision. This may force OPEC into either announcing a longer reduction or a deeper cut. Saudi Arabia and Russia, the largest participants of the output cut, already announced on 15 May that they had reached an agreement to extend their oil output cuts for another nine months, through March 2018. This increases the probability that all other members will also agree to such an extension.
Some relief for the CAD could come from the OPEC meeting if it succeeds in lifting oil prices, but it will take time for the CAD’s fundamental undervaluation to correct.
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