Forex Weekly Outlook – Sep. 25-29 2017

The US dollar rallied on the Fed decision but its strength faded away. What’s next? The German elections, durable goods orders, and several GDP publications stand out as Q3 draws to a close. Here are the highlights for the upcoming week.

The Federal Reserve announced the beginning of reducing its balance sheet, as expected. They also intend to raise rates in December and three times in 2018, something that caught the markets somewhat off guard and sent the dollar higher. Yellen and her colleagues see low inflation as a “mystery” but at least for now, see it as rising. Doubts over the chances of a hike eventually limited the dollar’s gains. In the UK, the pound slid on May’s speech but still looks strong on the prospects of a rate hike. The war of words around North Korea triggered only limited dips on USD/JPY.

1. New Zealand elections: Saturday. The general elections in New Zealand were supposed to be a smooth sailing for the ruling National Party. PM Bill English served as finance minister during most of the current 9-year reign of the party, and the economy is doing well. However, a late change in leadership in the opposition Labour Party turned the election into a much closer one. The young and energetic Jacinda Arern is leading in some polls and this has sent the kiwi lower. Markets clearly prefer the market-friendly National Party and a continuation in general. A victory for English’s party will send NZD higher and a win for Ardern’s Labour will likely send it lower. The polls indicate that everything is possible.
2. German elections: Sunday, results are due before markets open in Asia. All the polls suggest that Chancellor Angela Merkel is headed for an easy win into fourth and probably her last term, leading the center-right  CDU party. The German economy is doing well and her international standing is praised. Her opponent, center-left SPD leader Martin Schulz, is far behind in the polls. Both are pro-European and both have competed in lambasting Donald Trump. While the differences are small (and both parties are in coalition), markets prefer Merkel in the chancellory and they will almost certainly get it. A surprise win for Schulz, which is highly unlikely, could hurt the euro. A more open question is about Merkel’s coalition: a repeat of the grand coalition with the SPD? Or a coalition with the business-friendly FDP, which is set to return to parliament. Markets prefer the FDP, but coalition negotiations take a lot of time in Germany, so it is hard to see an immediate reaction. All in all, a victory for Merkel would be positive for the euro, but this is mostly priced in.
3. US  CB Consumer Confidence: Tuesday, 14:00. The Conference Board’s consumer confidence measure stood at 122.9 points in August. While the peak was a bit higher, this is still high ground. Consumer confidence measures do not always reflect actual retail sales, but still, move markets. A score of 119.6 is projected.
4. US  New Home Sales: Tuesday, 14:00. Sales of new homes trigger wider economic activity such infrastructure development. In August, sales dropped to 571K from 600K+ levels. An increase to 591K is on the cards.
5. US Durable Goods Orders: Wednesday, 12:30. Sales of durable goods reflect investment and are eyed by the Fed for future growth. Headline orders dropped by a whopping 6.8% in July, but the numbers are skewed by aircraft sales. A rise of 1.1% is estimated. Core orders rose by 0.5% and gained more attention. A more modest rise of 0.2% is forecast.
6. New Zealand rate decision: Wednesday, 20:00. The Reserve Bank of New Zealand is expected to leave the interest rate at 1.75% once again. The RBNZ likes to complain about the strength of the currency, and this time, the elections will have a material effect on the exchange rate, thus determining the reaction from Graeme Wheeler and his colleagues. They usually “make the trend their friend”. So, a drop in the NZD could provide an opportunity to push it even lower, while a rise in the currency would be hard to mitigate.
7. US GDP (final): Thursday, 12:30. The second read of Q2 GDP was upbeat, reaching the magic number of 3% annualized growth, better than 2.6% initially released. It is also a relief from poor growth rates seen in Q1 2017 and the whole of 2016. This is the final read of Q2 GDP. A small upgrade to 3.1% is on the cards.
8. UK GDP (final): Friday, 8:30. The UK economy enjoyed robust growth in 2016, before and after the EU Referendum. Things have changed in 2017, with slower growth. According to the second estimate for Q2, GDP grew by 0.3% q/q. This will likely be confirmed in the final read.
9. Euro-zone inflation (flash): Friday, 9:00. Headline inflation increased to 1.5% y/y in August, while core inflation held its ground at 1.2%. The gradual rise in inflation, as well as stronger growth in the euro-zone are moving the ECB closer to the exit from the QE program. However, the exact details of tapering down the bond-buying scheme depend on the data. Headline inflation is expected to rise to 1.6% while core inflation is predicted to remain steady at 1.2%. Higher levels of inflation can shorten the process, while protracted low inflation can slow it down.
10. US Core PCE Price Index: Friday, 12:30. This is the Fed’s favorite inflation measure, the core of the core if you wish. It stood at 1.4% in July, slowing down. With core CPI standing at 1.7% in August, core PCE will likely remain unchanged. At the same time, the BEA publishes personal income and personal consumption data, but the key figure for the Fed is core PCE. A monthly rise of 0.2% is expected.
11. Canadian GDP: Friday, 12:30. Canada’s economy grew at a robust rate of 4.5% annualized in Q2, pushing the Bank of Canada to raise rates. Month over month, the economy grew by 0.3%. We now get a first look into Q3 with the number for July.

*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

Safe trading!