Forex Weekly Outlook – Oct. 23-27 2017

The US dollar advanced against most currencies, but the moves were limited.The upcoming week is quite busy, featuring initial GDP reads from the US and the UK, rate decisions from the BOC and the ECB, and more.   Here are the highlights for the upcoming week.

The Federal Reserve is still set to raise rates in December, despite weak inflation. These are the hints we received from top Fed officials. The greenback enjoyed the news about progress on tax reform, even though the road is long. The euro managed to keep its head up despite a significant deterioration in the Catalan crisis. The pound suffered from the BOE’s lack of enthusiasm to raise rates and mixed data. The yen dropped as Abe’s chances for a victory are rising. Australia’s jobs report supported the Aussie but the biggest mover was the kiwi. NZD/USD plunged on the news that Labour will lead the government and not the more market-friendly National.

1. Japanese elections: Sunday, results expected before markets open. Japanese PM Shinzo Abe called a snap election and thought to take advantage of the weakness of the main opposition party. However, the recently elected Governor of Tokyo posed a challenge and gained some ground in the polls. However, her new party is unlikely to unseat Abe. In case he gets a wide majority, the yen could weaken as he plans further fiscal stimulus. In case he only wins a small majority, the yen could strengthen on worries that the current policy could be stalled. The latest expectations are very optimistic for Abe’s LDP party.
2. Australian CPI: Wednesday, 00:30. Australia publishes its inflation figures only once per quarter, making every event quite substantial. Headline CPI advanced by only 0.2% in Q2 2017, falling short of expectations. The Trimmed Mean CPI (known as Core inflation in other places) rose by 0.5% as expected. Headline CPI is expected to rise by 0.8% and core CPI by 0.5%.
3. UK GDP (first release): Wednesday, 8:30. The British economy grew at a slow pace in the first half of 2017, a quarterly rate of 0.3% in both Q1 and Q2. This is very different from 2016, which saw a much quicker growth rate. Brexit began biting, but a recession seems unlikely. Has the economy picked up in Q3? Expectations are for 0.3% q/q once again.
4. US Durable Goods Orders: Wednesday, 12:30. The volume of durable goods orders expanded by 2% in August while core orders rose by 0.5%. These figures feed into the GDP data and reflect investment. We now get the data for September, that closes the third quarter. It will impact the GDP release later in the week. Headline orders are predicted to advance by 1.1% while core orders carry expectations for 0.5%.
5. Canadian rate decision: Wednesday, 14:00, press conference at 15:15. The Bank of Canada raised interest rates in two consecutive meetings, boosting the Canadian dollar. However, in a recent public appearance, Governor Stephen Poloz said it was a “normalization”: undoing of the two rate hikes from 2015. And while growth is strong and inflation is set to pick up, the next moves will be much slower. So, the BOC is expected to leave the interest rate unchanged at 1%. The reaction depends on the message. If the Bank remains optimistic and hints at further hikes in 2018, the loonie could rise. A “wait and see” approach could send the C$ to fall.
6. US New Home Sales: Wednesday, 14:00. While sales of new homes are only a small part of all transactions, they trigger wide economic activity. In August, the annualized level of home sales stood at 560K. A very similar number is projected now, 556K.
7. ECB Rate decision: Thursday, the decision is at 11:45, press conference at 12:30. The ECB is not expected to change its interest rates, but an announcement about the future of the QE program is on the cards. The Bank currently buys bonds worth 60€ billion per month. This program expires at the end of the year. Recently, reports have circulated that they intend to cut it to between 25 to 40 billion euros, with this extension running through September 2018. Another report suggested that a balance sheet of 2.5 trillion euros is the limit. This leaves them with limited space for bond buys, as they are expected to hit 2.28 trillion by year-end. Expectations stand at around 30 billion per month for 9 months. A slower pace of reduction will hurt the euro while a higher pace can boost it. A lot also depends on the tone of the ECB President Mario Draghi. Back in September, he complained about the exchange rate quite a bit. Since then, EUR/USD is some 200 pips lower. Will he express satisfaction or continue trying to press the euro lower? This time, no new forecasts are planned, so Draghi’s words carry more weight.
8. US GDP (first release): Friday, 12:30. After a poor start to 2017, US growth picked up in Q2 and reached 3.1% annualized. A somewhat slower growth rate is expected in Q3, partly due to the hurricanes. This is the first release out of three, with two revisions pending. Nevertheless, this initial publication has the biggest impact. An annualized growth rate of 2.7%is on the cards.  

*All times are GMT

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Further reading:

• EUR/USD forecast – for everything related to the euro.
• GBP/USD forecast – Pound/dollar analysis
• USD/JPY forecast – outlook for dollar/yen
• AUD/USD forecast – projections for the Aussie dollar.
• USD/CAD forecast – Canadian dollar predictions

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