Forex Weekly Outlook Sep. 24-28 – The Fed decides, tariffs are implemented, Brexit means drama

The US finally announced the new tariffs on China and markets seemed to accept. Will  this atmosphere continue?   The Fed decision stands out in the last week of September, but there are other events as well. Here are the highlights for the next week.

The US went forward and announced a 10% tariffs on $200 billion worth of Chinese goods. The move was well-telegraphed and 10% is lower than the 25% that was touted. So, the market reaction was relatively calm. EUR/USD advanced nicely and commodity currencies recovered as well. on the dollar weakness that was a result of the risk-on move. Brexit provided some drama. The Salzburg Summit ended in acrimony as the EU rejected Britain’s Chequers proposal flat out. The response by PM May was also swift in a defiant televised speech, perhaps intended to soothe hard Brexiteers before the Conservative Party Conference. The pound tumbled down on Friday after a week of gains.

1. US CB Consumer Confidence: Tuesday, 14:00. The Conference Board’s consumer confidence measure hit a high of  133.4 in August, the highest level since November 2000. The publication caught the attention of President Trump. Can it continue higher? Consumer sentiment is correlated with consumption. A score of 132.2 is on the cards.
2. US  New Home Sales: Wednesday, 14:00. Contrary to other segments of the US economy, the housing sector has been somewhat on the back foot. Sales of new homes disappointed with an annualized level of 627K in July. A similar figure is likely for August. A level of 630K is on the cards.
3. Fed decision: Wednesday, decision and dot-plot at 18:00, press conference by Fed Chair Jerome Powell at 18:30. The Fed will raise rates. That is certain after the move was well-telegraphed by the FOMC members and recent data has been mostly positive. A relatively more open question is: will they raise rates in December, making it a total of four hikes? And the greatest unknown is what the Fed will do next. Will Powell and co. move from an accommodative policy to a tight one or settle for neutral? A tight policy means setting interest rates above the inflation level. This was recently hinted by Fed Governor Lael Brainard. Wage data has been robust, with 0.4% m/m and 2.9%. However, the most recent Core CPI number disappointed with Core CPI sliding from 2.4% to 2.2%. The current composition of the Fed is quite hawkish and the stance is unlikely to change at this juncture. A few more weak inflation figures will probably be needed for a change of heart at the central bank. The first reaction will come from the dot-plot: the document that details the Fed projections for interest rates and also for inflation, growth, and employment. These numerical figures are easily digested by markets. A quick digest of the regular Fed statement will come next before Powell begins speaking. The Fed Chair tip-toes around politically sensitive topics such as tariffs but provides straight answers about monetary policy. Tension is expected to mount towards the event. We will then see quite a bit of choppiness around the release with a second and a third reaction afterward. This is easily the most important event of the week.
4. New Zealand rate decision: Wednesday, 21:00. The Reserve Bank of New Zealand has recently shifted to the dovish side, opening the door to rate cuts down the line. However, the team led by Adrian Orr is unlikely to slash the 1.75% Official Cash Rate just now. A reiteration of the dovish policy and especially a hint of an upcoming cut may weigh on the kiwi. This may come despite OK GDP data. Orr will hold a press conference at 22:00 and will move markets.
5. US GDP: Thursday, 12:30. The US economy grew at an annualized pace of 4.2% in Q2 2018, the fastest in four years. This is according to the second release of GDP. The third and final release of GDP will likely result in a similar figure, allowing Trump to take another victory lap. Q3 may be somewhat slower. A confirmation is on the cards.
6. US Durable Goods Orders: Thursday, 12:30. Orders of durable goods represent investments, are eyed by the Fed and also feed into GDP, Q3 GDP in this publication for August. Orders dropped by 1.7% in July, but the headline figure is volatile. Core Orders ticked up by 0.1% according to the revised data, which is OK. We may see better figures now. Headline orders carry expectations for a rise of 1.9% and core orders are projected to advance by 0.4%.
7. UK Final GDP: Friday, 8:30. The UK economy grew by 0.2% in Q2 according to the initial release that came alongside the first monthly report for June. While we already know the monthly number for July, this final release of Q2 GDP is expected to provide a broader outlook on the economy. The quarterly figures don’t usually change but revisions to the weekly numbers are more common.
8. Euro-zone inflation: Friday, 9:00. Headline inflation stood at 2% in August, bang on the ECB’s target. However, core CPI disappointed with only 1%. The increase in energy prices made the difference. ECB President Mario Draghi was not very worried about weak core inflation in his last press conference. We will now get the preliminary numbers for September, just as the ECB tapers down its bond-buying scheme. Slightly higher figures are projected now: 2.1% on the headline and 1.1% on the core.
9. Canadian GDP: Friday, 12:30. Canada releases its monthly GDP read for July, the first look into Q3. June’s figure disappointed by remaining flat, but Q2 was quite positive in general, a comeback quarter after a weak Q1. A rise of 0.1% is on the cards.
10. US Core PCE Price Index: Friday, 12:30. This is the Fed’s favorite inflation measure which differs in methodology from the Core CPI number that is released earlier in the month. Core CPI fell short of expectations with 2.2% YoY against 2.4% expected and seen beforehand. Core PCE stood at 2% in July and if we draw a straight line, it may now fall to 1.8%. However, the numbers are not always 100% correlated. A more significant drop may weigh on the dollar while a minor slide to 1.9%, for example, could be encouraging. The monthly Core PCE is expected to rise by 0.1% after 0.2% beforehand.

*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 – the outlook for dollar/yen
• AUD/USD forecast – projections for the Aussie dollar.
• USD/CADc forecast – Canadian dollar predictions

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