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Monetary policy is once again back in the driving seat for FX markets as we await updates from the US Federal Reserve and the Bank of England whilst continuing to digest last week’s European Central Bank’s “tapering-but-not-tapering” announcement.
The headline event will take place across the Atlantic on Wednesday as the Federal Reserve’s Open Market Committee (FOMC) meet for the final time in 2016. An interest rate hike is largely priced in, as expectations for a hike as per Fed fund futures surged to 100% following Donald Trump’s election a month ago, meaning that any reaction to the event from US Dollar currency pairings is likely to be minimal; although with that being said, there is the potential that the last few Fed sceptics will wait until a hike is announced before getting on board for a mild US Dollar rally.
What will likely be the driver for a larger move, however, will be the growth and inflation forecasts that are released simultaneously to the interest rate decision as well as Fed Chair Janet Yellen’s press conference taking place shortly afterwards. A decidedly hawkish outlook for 2017 (comprising of 3 or 4 expected hikes backed by 10 or more Fed members) similar to 2016’s full year forecast would likely see the Dollar sharply rally. Yet, after the fiasco of last year’s predictions that had to be significantly re-evaluated (damaging the reputation of the Yellen and institution) a repeat of this approach is unlikely, even when considering the Trump reflation trade for 2017.
On Thursday, Governor Mark Carney and the Bank of England’s Monetary Policy Committee (MPC) offer their latest monetary policy update. Unlike their US counterparts, the UK’s policy makers have a raft of macro economic data released in the run up to their meeting to consider, meaning that Carney and co.’s reaction could be varied, although any actual change to policy is unlikely to take place.
Should headline CPI inflation data on Tuesday come in above the forecasts for a 0.1% and 1.1% respective increase in the monthly and yearly figures, coupled with an uptick in Average Weekly Earnings on Wednesday, the MPC might choose to adopt a hawkish tone for the post-decision presser, following on from similar comments suggesting an overshoot of inflation targets will only be tolerated to a degree. This might act to preserve the recovery of Sterling against its US and European peers since the ‘flash crash’ on October 8. Conversely, weaker than expected figures could lead to a furtherance of the wait-and-see approach adopted by UK policymakers since the interest rate cut made in the aftermath of the Brexit vote. Data is key.
Finally, the performance of the Euro over the coming week will likely be dually-hinged on the performance of its Anglo-American counterparts and the ongoing political and banking situations developing in Italy. A failure over the weekend to finalise a recapitalisation deal for Monte dei Paschi di Siena was largely brushed over as Foreign Minister Paolo Gentiloni was approached by the country’s President, Sergio Matterelli, to become interim Prime Minister following Matteo Renzi’s resignation.
The swift appointment of a new political leader (and one that is seen at odds with Renzi’s fiery character) could help to speed up a resolution for the country’s third largest lender, seen as the biggest concern for the wider European banking sector. Should this be the case, the Euro could be relieved of some of the downward pressure of last week and subsequently be lifted from around 21-month lows, having posted a fresh low this time last week. Bene.
Key data this week (Sign up here to get our daily live macro-calendar)
Intl Economic Announcements
Sunday:
23:50 Machine Orders (JP)
Monday:
06:00 Machine Tool Orders (JP)
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UK Economic Announcements
09:30 CPI, RPI, PPI & House Price Index
Intl Economic Announcement
02:00 Industrial Production & Retail Sales (China)
07:00 CPI (DE)
10:00 Unemployment & ZEW Survey (EZ)
10:00 ZEW Surveys (DE)
23:30 Westpac Consumer Confidence (AUS)
23:50 Manufacturing Outlook (JP)
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UK Economic Announcements
09:30 Unemployment Data
Intl Economic Announcements
04:30 Industrial Production (JP)
10:00 Industrial Production (EZ)
13:30 Advance Retail Sales, PPI (US)
14:15 Industrial & Manufacturing Production (US)
15:00 Business Inventories (US)
15:30 Crude Oil Inventories (US)
19:00 US Fed FOMC Monetary Policy Decision
—
UK Economic Announcements
09:30 Retail Sales
12:00 BoE Monetary Policy Decision
Intl Economic Announcements
00:30 PMI Manufacturing (JP)
8-9am Manufacturing & Services PMI (FR/DE/EZ)
13:30 CPI, Empire Manufacturing & Philly Fed (US)
14:45 Manufacturing PMI (US)
15:00 NAHB Housing Market Index (US)
—
Intl Economic Announcements
10:00 CPI (EZ)
13:30 Housing Starts & Building Permits (US)
18:00 Baker Hughes Rig Count (US)
Technicals
Technicals
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