Forex Weekly Outlook March 14-18

The ECB’s massive policy announcement did not receive the desired fall in the euro, and the US dollar lost ground in an exciting week.  Rate decisions in Japan the US, the UK and Switzerland, Employment data from the UK, the US and Australia, US inflation, manufacturing and sentiment figures. These are the highlights for this week. Join us as we explore these market-movers on our weekly outlook.

The  European Central Bank used every trick in the book to avoid a dangerous deflation-trap in its monthly rate meeting. Draghi cut the deposit rate by 10 basis points to a  historic low of -0.4%; increased the pace of quantitative easing from €60bn to €80bn a month; offered banks unlimited four-year loans at near-zero cost to compensate for the damaging side-effects of negative rates.  The euro initially dropped but this last only one hour, until Draghi made the mistake of saying no more moves are likely. Elsewhere, higher oil prices contributed to a better market mood despite mixed Chinese data. The focus now returns to the US. Let’s start:

1. Japan rate decision: Tuesday. The Bank of Japan surprised financial markets by adopting negative interest rates for the first time ever in an attempt to boost growth.  BOJ decided to implement a negative rate of 0.1% and charge banks for depositing their excess funds. Analysts did not anticipate this move. The bank also maintained its program to buy government bonds. The BOJ noted that the economy recovered modestly and that there is an increase in inflationary pressures. There is a lot of uncertainty about this decision. On one hand, Kuroda has more leeway to act after Draghi’s move. On the other hand, the effectiveness of such moves is limited.
2. US Retail sales: Tuesday, 12:30. U.S. consumer spending increased more than forecast at the beginning of the year, rising 0.2% after a revised 0.2% increase in December. Sales were up 3.4% compared to January 2015. Furthermore, core retail sales, excluding the auto sales rose 0.1%, compared to a flat reading expected by economists. Sales continue to benefit from falling gasoline prices. The positive sales figures dampened recession fears but are not strong enough for another Fed rate hike decision. Retail sales are expected to decline 0.1% while core sales are forecasted to drop 0.2%.
3. US PPI: Tuesday, 12:30. U.S. producer prices edged up unexpectedly in January despite lower energy prices. Producer price index increased by 0.1% after a 0.2% fall in the previous month. Analysts expected the index to decline 0.2%. The final demand services index increased 0.5%. Margins for machinery and equipment jumped 4%. However despite the rise in the cost of services, declining oil prices and a stronger dollar continued to weigh on wholesale prices. Economists expect producer prices to decline 0.1% this time.
4. UK Employment data: Wednesday, 9:30. The  number of people claiming unemployment benefits plunged by 14,800 in January to the lowest level since 1975. The reading surprised analysts predicting a smaller decline of   2,900. However, despite this decline, the unemployment rate disappointed for the first time remaining at 5.1%, while analysts expected a decline to 5.0%. The number of UK jobless claims is estimated to decline by 9,000 in February.
5. US Building Permits: Wednesday, 12:30. The number of building permits dropped 0.2% to a 1.202 million-unit rate in January. Permits for the construction of single-family homes fell 1.6% and multi-family building permits increased 2.1%.  Likewise, housing starts fell amid bad weather, disrupting building projects in some parts of the country. Single-family housing starts, the largest segment of the market, fell 3.9%. The number of building permits is expected to remain around 1.2 million.
6. US Inflation data: Wednesday, 12:30. Consumer Price Index, excluding the volatile food and energy components edged up by the most in nearly 4-1/2 years in January, amid rising rents and healthcare costs. The reading beat analysts forecast of a 0.2% rise and following a 0.1% increase in the prior month. Meanwhile the overall CPI remained unchanged after falling 0.1% in December. The rise in core CPI together with the constant improvement in the employment market suggest further rate hikes in the coming months. Consumer Price are forecasted to fall 0.2% while core process are expected to rise 0.1%.
7. US Rate decision: Wednesday, 18:00. The U.S. Federal Reserve maintained rates on January, noting it was “closely monitoring” global economic and financial developments, before deciding on further rate hikes this year. The decision was in line with market forecast. Fed officials said the economy was growing moderately with a stronger employment market. The concerns lay on global economic and financial developments and their effect on US labor market and inflation. Economists expect a one quarter-point rate increase in 2016, probably on July. No change is expected now, but the updated forecasts and press conference promise a lot of action. Will they  lower their  interest rate projections?
8. New Zealand GDP: Wednesday, 21:45. New Zealand’s economy expanded more than forecast in the third quarter, growing 0.9% from 0.4% in the second quarter. The third-quarter growth rate exceeded the 0.8% forecast. The Reserve Bank of New Zealand expects faster economic growth and higher inflation this year. The boost in growth is attributed to a surge in spending by  tourists and retail trade. New Zealand’s growth is expected to reach 0.7% in the fourth quarter of 2015.
9. Australian Employment data: Thursday, 0:30. Australian employment market shed 7,900 jobs in January, while expected to gain 13,000. Full-time employment declined by 40,600, while part-time jobs increased by 32,700. Australia’s unemployment rate jumped to 6% from 5.8% accordingly, the highest level recorded since September 2015.  The participation rate remained steady at 65.2%. However, the outlook for the job market remains positive. Economists believe Australia is unlikely to face a recession in 2016 but weak national income poses risks to the economy. Australian job market is expected to add 12,300 positions in February while the unemployment rate is estimated to remain at 6%.
10. Switzerland: Rate decision: Thursday 8:30. Switzerland’s central bank kept its record-low interest rates unchanged after the ECB did the same, giving the Swiss franc some breathing space in its battle with the euro. The central bank decided to maintain its target range for three-month Libor between -1.25 and -0.25% in line with market forecast.  Switzerland’s economic activity weakened in the third quarter due to the franc’s fall. The SNB predicts growth would reach 1.5% in 2016 with inflation at -1.1% . Price growth is expected to recuperate in 2017.
11. UK rate decision and meeting minutes: Thursday, 12:00. The Bank pf England cut its forecast for growth, wages and inflation, but kept rates unchanged. Mark Carney raised market speculation that a global economic slowdown could prompt a rate cut. But the policymakers voted unanimously to hold borrowing costs unchanged. Carney said he wants to prepare households and businesses for the scenario that borrowing costs are expected to rise over the next two years. However, according to the Bank’s latest outlook it seems that policymakers are in no hurry to raise rates anytime soon. The meeting minutes showed a unanimous decision against raising rates. Another unanimous vote is likely.
12. US Philly Fed Manufacturing Index: Thursday, 12:30. The manufacturing activity index in the Philadelphia area remained weak in February but improved to minus 2.8 from minus 3.5 in January. The index remained in negative territory for six continuous months however the reading was better than the minus 2.9 forecasted by analysts. Exports remained positive but new orders and employment indexes remained negative dropping modestly. Philly Manufacturing Index is expected to improve further to -1.1 this time.
13. US Unemployment Claims: Thursday, 12:30.  Initial claims for U.S. unemployment benefits plunged by 18,000 last week reaching 259,000. The reading was much better than expected posting the lowest level since mid-October. Economists forecasted 272,000 new claims last week. The four-week moving average fell by 2,500 to 267,500, the lowest figure since October 31 week. The number of new claims is expected to reach 267,000 this time.
14.  US UoM Consumer Sentiment: Friday, 15:00. Consumer sentiment deteriorated in February reaching 90.7 compared to 93.3 posted in the prior month. Analysts expected a reading of 92.7. Oddly enough, the lukewarm sentiment reading followed positive retail sales figures in January spurred by a stronger labor market and higher income gains due to the ultra-low inflation. US Consumer sentiment In March is predicted to reach 92.3.

That’s it for the major events this week. Stay tuned for coverage on specific currencies

*All times are GMT.

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