Good Mornig All;
will see a new weekly currency Analysis.
Volatility in markets continued last week as investors continued to react to a less-dovish than expected ECB earlier in the month, as well as further drops in oil prices and expectations of a possibly more-dovish outlook from the US Fed. The main event this week is the Fed’s December interest rate decision, out Wednesday. The Fed is widely expect to raise interest rates, and attention will then turn to any guidance the Fed provides about policy going forward. Key releases this week include inflation figures from the UK and the US, as well as Eurozone Economic Sentiment and German Business Climate figures.
GBP – The main event on the UK’s economic calendar last week was Thursday’s Bank of England meeting. The BOE’s outlook was largely similar to the views it took in November, including an increase in the downward pressures on inflation, including continuing drops in oil prices and slower wage growth. CPI is not expected to hit 1% until the second half of 2016. Out earlier in the week, Manufacturing Production contracted more than forecast, although Industrial Production as a whole unexpectedly ticked up 0.1%. The NIESR GDP estimate indicated growth of 0.6% over the past three months, while the previous month’s figure was revised down to 0.5% from 0.6%. The UK’s Trade Balance widened more than forecast.
Releases to keep an eye on this week include CPI, Average Earnings, unemployment, and Retail Sales figures. Inflation is forecast to tick up 0.1% in November after two consecutive months at -0.1%, which could offer the pound some support, particularly as the BOE has previously indicated that it expects inflation to beginning picking up towards the end of the year. With inflation not expected to hit 1% until the second half of 2016, low levels of inflation may continue to weigh on the pound until there is a stronger pick-up. Wage growth is forecast to have slowed again in November, while Claimant Count Change is expected to have ticked up slightly; markets may have less of a reaction to these figures unless they significantly surprise as attention will largely be on the Fed’s interest rate decision later that day. Retail Sales, out Thursday, are forecast to return to growth after contracting more than forecast in October. Prime Minister Cameron will meet with other EU leaders at a working dinner on Thursday to discuss UK-EU negotiations for the UK’s upcoming EU referendum.
EUR – Last week was a quieter data week for the Eurozone after the previous week’s less-dovish than expected ECB meeting and resulting euro volatility. Some of that volatility continued into last week as the euro largely held its ground against both the pound and the dollar, gaining slightly further ground against the dollar as the dollar weakened. Greece was among the topics discussed at Eurogroup meetings last week. Final Q3 GDP growth for the Eurozone remained unchanged at 0.3%.
Releases to keep an eye on this week include German and Eurozone Economic Sentiment, Flash Manufacturing and Services PMI figures, Final Eurozone CPI, and German Business Climate. Economic sentiment is forecast to improve in both Germany and the Eurozone as a whole, while Manufacturing and Services figures may dip. CPI is expected to remain unchanged at 0.1% compared to a year prior, and the Business Climate in Germany may improve slightly further, with the index forecast to rise from 109.0 to 109.2. Relative euro strength may continue this week, with the possibility of volatility, particularly against the dollar if the Fed surprises markets at its highly anticipated meeting.
USD – The dollar weakened against both the pound and the euro last week as focus turned from anticipation of a Fed rate increase to speculation on the tone of the Fed’s accompanying economic outlook and press conference. As oil prices fell further last week, markets speculated that increased downside pressures on inflation might lower the Fed’s projections for the Federal Funds Rate over the coming year. Positive data on Friday was outweighed by dollar weakness ahead of the Fed’s meeting. Core Retail Sales were up 0.4%, Retail Sales 0.2%, the Producer Price Index 0.3%, and Core PPI 0.3%. Consumer Sentiment rose less than forecast, and weekly Unemployment Claims ticked up slightly more than expected. Import Prices fell less than forecast.
The main question for markets this week is whether the Fed raises interest rates on Wednesday, as it is widely expected to do, and what guidance the Fed provides in its accompanying press conference and updated economic outlook. The tone of the Fed’s comments, and its definitions of gradual in regards to the path of future rate increases, may dictate whether the dollar strengthens or weakens following the interest rate decision. The likelihood of a rate increase has been clearly telegraphed recently, as a result of which lift-off in policy normalisation may by now be largely priced in. If the Fed does not raise interest rates, there would likely be volatility in markets and the dollar would likely weaken. Other releases to keep an eye on this week include inflation figures on Tuesday. After ticking up 0.2% in October, CPI m/m is forecast to remain unchanged in November. FOMC Member Lockhart will speak on Friday on the economic outlook for 2016.