The US dollar continued enjoying the optimism from the tax cuts and was not hit hard by the data. Can it continue higher? Four rate decisions await us: the SNB, ECB, BOE, and the FED, with Yellen’s last post-rate decision press conference. Can the dollar continue higher? Here are the highlights for the upcoming week.
The US dollar received a lot of support early on from the approval of the tax bill in the Senate Things are advancing relatively smoothly towards the final approval. The Non-Farm Payrolls report was mixed: upbeat job gains of 228K but with yet another weak wage rise of 2.5% y/y. This will not stop the Fed from raising the rates. The EU and the UK eventually reached an agreement to unlock the second phase of the Brexit negotiations in a whirlwind week of negotiations. There are still many uncertainties that limited the pound.Updates:
- UK inflation: Tuesday, 9:30. Headline CPI reached the top of the range in both September and October, at 3% y/y. This is a result of the weaker pound, which in itself is a result of Brexit. The Bank of England forecasts a slide in inflation moving forward, and this will be the first test. The outcome also feeds into the rate decision later in the week. Expectations still remain high at 3%.
- US PPI: Tuesday, 13:30. Producer prices advanced quite nicely in October, by 0.4% m/m and also core PPI followed suit with a rise by the same scale. Producer prices eventually feed into consumer prices and this publication serves as a hint towards the CPI on the following day. Another rise of 0.4% in headline PPI is predicted. Core PPI carries expectations for 0.2%.
- US Inflation: Wednesday, 13:30. Hours before the Fed decision, we will get to know if inflation remains subdued and how “transitory” it really is. The report for October showed a small rise in core inflation, from 1.7% to 1.8% y/y, prompting the same tick up in the Fed favourite Core PCE, from 1.3% to 1.4%. Another rise in the report for November will make a more convincing case for a rate hike, but surprises are not uncommon. A rise of 0.4% is projected for headline CPI and +0.2% for core CPI.
- US rate decision: Wednesday, 19:00, press conference at 19:30. The Fed is expected to raise rates for the fifth time in the cycle and third time this year. The hike from to a range of 1.25% to 1.50% has been well-telegraphed for a long time. This time, the Fed also releases forecasts for inflation, employment, growth, and interest rates. At the moment, the central bank foresees three additional hikes in 2018. Will they stick to their guns? Markets are skeptical, but they will probably signal continuity before Powell makes his own mark. However, this is an open question as inflation remains low. Outgoing Fed Chair Janet Yellen initially shrugged off lower price rises as “transitory“, then called it “a mystery” and eventually admitted that it might not necessarily be that transitory. What are her views this time? Apart from the forecasts, the tone of the statement and her press conference, her last post-rate decision statement, will be telling. We can expect incoming Chair Jerome Powell to vote with the majority as always and we can expect Neel Kashkari of the Minnesota Fed to dissent, as he previously did earlier in the year. The Fed will try not to rock the boat too much, but markets may cling to any small semantic change in the statement, a shift in the projections, or Yellen’s tone to try and look into 2018.
- Australian jobs report: Thursday, 00:30. The recent jobs report in Australia was somewhat disappointing, with a gain of only 3.7K jobs in October, lower than previous levels. The unemployment rate stood at 5.4%. In the recent rate decision, the RBA sounded upbeat about the jobs market, so perhaps October’s report was a one-off low and now we’ll get a rebound. A gain of 19.2K is on the cards and the unemployment rate carries expectations for remaining at 5.4%.
- Swiss rate decision: Thursday, 8:30. The Swiss National Bank makes its decisions about the Libor Rate only once per quarter. It is expected to leave the rate unchanged at -0.75%, keeping it negative to discourage inflows that depress Swiss exports and also inflation. It will probably reaffirm its policy of occasional FX interventions to hold the CHF low. This comes despite the recent rises in EUR/CHF. A change in policy is unlikely, and will likely lead to a stronger franc. Many traders are still reeling from the January 2015 SNBomb.
- UK rate decision: Thursday, 12:00. In November’s “Super Thursday” meeting, the Bank of England raised the interest rate back to 0.50%, citing the rise in inflation. However, it was a very “dovish hike”: they forecast only two more rate hikes in the span of three years. So, no change is expected now. This time, we will receive the meeting minutes but no new forecasts. It will be interesting to see if some members support a further hike to curb the still-high inflation, or if some regret the hike and want to cut it back to 0.25%. A unanimous “no-change” vote is more likely among the 9-member Monetary Policy Committee ahead of the holidays.
- Euro-zone rate decision: Thursday, 12:45, press conference at 13:30. The big news was out already at the October meeting. The ECB will halve the volume of its bond-buys in January to 30 billion euros per month and the program will run through September 2018. Draghi left the door open to what happens afterward, and that was a dovish sign that sent the euro down. Since then, weak inflation reads, especially with core CPI slipping to 0.9%, vindicated his dovishness. This time, no changes are expected, but the ECB will publish new staff forecasts for inflation and growth. A downgrade of inflation forecasts could serve to weaken the euro and Draghi could join in. However, it is hard to ignore the robust growth, especially in Germany (0.8% q/q). As usual, Draghi will continue his balancing act. If he talks about ending QE after September, the euro will jump, but this is unlikely. The ECB can wait until around June to make such future announcements.
- US retail sales: Thursday, 13:30. The US consumer is key to the economy. The volume of retail sales rose by 0.2% in October while core sales increased by 0.1%, a mixed outcome in comparison to expectations. We will now get the data for November, a month that includes the Black Friday sales. Will we see a big bump in sales? Note that the US will also publish jobless claims and import prices at the same time, but the retail report is much more important. A gain of 0.3% is forecast in headline retail sales and +0.7% in core sales.
*All times are GMT
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