US Dollar Forecast: Major events moving currencies

Browsing: US Dollar Forecast

By Yohay Elam on Dec 13, 2018

The US Dollar was on the back foot after the successful Trump-Xi Summit amid a high level of turbulence. The UK vote on Brexit and the ECB decision stand out. Here the highlights for the next week.

Presidents Trump and Xi agreed on a trade truce that consists of 90 days without new tariffs and intense negotiations. Markets rallied despite a lack of clarity on the details of the agreement. US yields dropped and with inversions at the low end of the curve, some fear a recession is underway. The Brexit debate in the UK Parliament began with the pro-Remain camp getting a boost from the ECJ opinion that the UK can unilaterally revoke Article 50. Italy extended its climbdown from the high budget deficit and talks with Brussels continue.

UK GDP: Monday, 9:30. The UK switched to publishing monthly estimates for its GDP growth earlier in the year. The publication for September was somewhat disappointing with 0% growth. Nevertheless, Q3 saw an upbeat expansion. We will now receive the first insight into Q4 with the publication for October. The outcome will feed into the Brexit debate.
UK jobs report: Tuesday, 9:30. As members of Parliament will get ready for the vote, they will have another top-tier indicator to ponder into and so will Sterling traders. Wages remain of high importance to the pound and also to the BOE. Average Earnings accelerated to 3% y/y in September, an encouraging development. The unemployment rate disappointed with a small increase to 4.1% that month. Another shortfall was seen in the Claimant Count Change, or jobless claims, for October which rose by 20.2K, above projections. We will now get fresh figures for November.
UK vote on Brexit: Tuesday, the exact timing of the vote is unknown at this point. UK PM Theresa May reached an agreement on the withdrawal of the country from the European Union. And now, Parliament will have its “meaningful vote” on the accord. The deal ends free movement of people and secures the rights of citizens but the agreement on the “Irish backstop” is criticized by many. It ensures an open border in the Emerald Isle but ties the UK to EU regulations. Under the accord, the UK leaves the EU on March 29th, 2019, but remains in an implementation phase until at least the end of 2020. The government lost the support of the Northern Irish DUP on which it relies and many pro-Brexit members of May’s Conservative Party stated they will vote against the accord. Several opposition Labour members may support her. At the moment, it seems that the government will fail to pass the deal. In this case, the Pound may suffer quite a bit, alongside stock markets. The expectation is that the UK will then return to Brussels, achieve a few minor concessions and return for a second vote. The tweaks and the rout in financial markets would then convince members to vote for the deal. Other scenarios include the passage of the deal in the first vote, a pound-positive development that is not priced in. A third scenario is a significant defeat for the government that would clarify there is no chance for a second vote. In this case, there are growing chances of a no-deal Brexit, which would be devastating for the pound, general elections in which Labour’s Jeremy Corbyn could become PM, a second referendum, or a reversal of Brexit. In this scenario, only uncertainty and high GBP volatility are guaranteed.
US CPI: Wednesday, 13:30. In the recent report for October, the headline Consumer Price Index advanced by 0.3%, and Core CPI by 0.2%. While the monthly figures were OK, the year over year Core CPI decelerated to 2.1%. The Federal Reserve’s preferred inflation measure, Core PCE, consequently dropped to 1.8% y/y. The fresh CPI data for November will provide fresh input for the Fed ahead of its rate decision.
Swiss rate decision: Thursday, 8:30. The Swiss National Bank makes its rate decision only once per quarter. The SNB shocked financial markets by abruptly dropping the peg of EUR/CHF to 1.20 back in January 2015. Since then, it left the Libor Rate unchanged at -0.75% and pledged to intervene in trade if necessary. Given the low levels of inflation, Governor Thomas Jordan and his colleagues are expected to leave the interest rate unchanged at this juncture.
ECB rate decision: Thursday: decision at 12:45, press conference at 13:30. The European Central Bank is set to end its bond-buying scheme at the end of the year. The upcoming decision will likely confirm this move. The ECB’s QE program runs at a monthly rate of €15 billion / month from October. The Frankfurt-based institution also pledged to keep interest rates at low levels through the summer of 2019. However, recent economic figures have disappointed. The German and Italian economies contracted in Q3, core inflation is not going anywhere fast, and forward-looking PMI’s are stagnant. President Mario Draghi may express some pessimism and perhaps hint that the ECB will push back the first rate hike towards the end of next year or even to 2020. The ECB will also publish fresh forecasts for growth and inflation and may downgrade some of the data points. Draghi’s tone will be critical to the reaction of the euro.
US Retail Sales: Friday, 13:30. The US economy is centered on consumption. Spending increased by an impressing 0.8% m/m in October while core sales advanced by 0.7%. We will now get the data for November, the month that includes Black Friday. The data also feeds into Q4 GDP and the upcoming Fed decision five days later.

*All times are GMT

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USD and forex general characteristics

The United States Dollar is the reserve currency of the world, partly due to its use in settling oil prices and other commodities. Foreign exchange pairs are divided into majors, minors, and crosses. Both majors and minors include the USD.

US economic indicators and political developments influence currencies more than anywhere else in the world. The decisions and statements by Federal Reserve officials make the biggest waves. The US economy is by far the largest in the world. US politics and policy also have an outsized impact on currencies.

The outlook consists of mostly US economic events but also key market-moving figures from other major economies. The euro-zone, the UK, and Japan stand out.

Recent USD Moves

The greenback suffered a bad start to the year: poor growth and scandals hurt the US dollar. Hopes for fiscal stimulus faded with the repeated failures to repeal Obamacare. Despite two rate hikes in the first half, the dollar struggled. Other economies outperformed America.

The second half already looks a lot different: economic growth reached 3% annualized and the Fed seems to stick to its plan to hike rates three times. In addition, Trump’s tax plan inspires markets, despite hurdles to pass it before Christmas.

Headwinds come from the political scandals. Low inflation also weighs on the dollar. If the “mystery” persists and wages do not accelerate, Janet Yellen and co. could refrain from further tightening. The new Fed Chair Jerome Powell will take office in February 2018, and he may not stick to the current plan of raising rates three times.