**A Critical Week Ahead for Markets: Central Bank Decisions and Key Economic Data to Steer Forex Traders**
By Dhwani Mehta for FXStreet | Enhanced and expanded by AI with additional research
The upcoming week is poised to be a seismic one for global financial markets, with central banks from the U.S., U.K., and Japan scheduled to reveal critical monetary policy decisions. Combined with the influx of influential economic data, this series of events is expected to bring heightened volatility to the forex market as investors adjust their expectations for interest rate paths, inflation trajectories, and economic growth potential.
Below is an in-depth look at the critical central bank events and economic indicators scheduled for release, and what currency traders should be watching.
## United States: FOMC Decision, CPI Data, and Market Sentiment
The U.S. economy will be front and center this week with several high-impact developments.
### Federal Reserve Monetary Policy Meeting (Wednesday)
– The Federal Open Market Committee (FOMC) meets on Wednesday, with markets pricing in a very low probability of a rate hike.
– Current expectations suggest the Fed will hold the federal funds rate within the 5.25%–5.50% range.
– Traders will be attuned to the updated Summary of Economic Projections, particularly the “dot plot,” which outlines individual policymakers’ interest rate expectations.
– In the previous dot plot (March 2024), officials forecasted three rate cuts by the end of 2024. In light of recent sticky inflation and resilient labor market data, markets anticipate policymakers may now predict only one or two cuts.
Market participants will focus on Fed Chair Jerome Powell’s post-decision press conference. Given recent comments stressing the need for more clarity on inflation before taking action, Powell could deliver a data-dependent message, reiterating that rate cuts hinge on sustained disinflation.
### U.S. Consumer Price Index (CPI) Inflation Report (Wednesday, ahead of the Fed)
– Scheduled for release just hours before the Fed decision, the May U.S. CPI will carry significant weight.
– Market consensus projects:
– Headline CPI: +0.1% m/m (vs. +0.3% in April), +3.4% y/y (unchanged)
– Core CPI (excludes food and energy): +0.3% m/m (same as April), +3.5% y/y (down from 3.6%)
– A strong inflation report could derail near-term Fed rate cut expectations, lifting the U.S. dollar and pushing Treasury yields higher.
– Alternatively, a weaker-than-expected reading could spark renewed rate-cut bets for September, weighing on the dollar and supporting risk assets.
### Implications for the U.S. Dollar and Currency Pairs
– The U.S. Dollar Index (DXY) is likely to remain volatile depending on the interplay between CPI readings and Fed communication.
– Key forex pairs to monitor include:
– EUR/USD: Prone to whipsaws around the inflation print and the Fed’s rate path signals.
– USD/JPY: Susceptible to yield differentials, especially in light of the Bank of Japan’s decision also looming.
## Eurozone: ECB Decision Behind Us, Inflation Reassessment Ahead
### ECB Recap
The European Central Bank (ECB) delivered a 25-basis-point rate cut last week, bringing the main refinancing rate to 4.25%. It marked the bank’s first cut since 2019. Price pressures in the Eurozone appear to have cooled, bolstering the ECB’s decision.
However, ECB President Christine Lagarde emphasized that the path of rate reductions would be gradual and data-dependent. The divergence between inflation dynamics in the Eurozone versus the U.S. could widen over the summer.
### EUR Regaining Some Footing
– The euro weakened against the dollar last week post-ECB but managed to regain some composure after surprisingly hawkish comments from ECB
Read more on USD/CAD trading.