we’ll see a new weeekly forex outlook.
Last week’s main event was Thursday’s ECB meeting and the resulting volatility in the euro. The ECB announced stimulus measures that were more aggressive than expected, before ECB President Draghi indicated at the press conference that interest rates may not be cut any further. Other data highlights included US Unemployment Claims, which fell to a four-month low, and UK Manufacturing and Industrial Production, which both returned to growth. Attention this week turns to a busy calendar, including meetings of both the Fed and the BOE, the UK’s Annual Budget, UK wage and inflation data, and US and Eurozone inflation figures, among other releases.
GBP – There were few major releases from the UK last week. Manufacturing and Industrial Production both returned to growth. Manufacturing Production rose 0.7%, more than forecast, while Industrial Production was up 0.3%, less than forecast. The pound took back some ground against the dollar last week, despite a limited data calendar and perhaps in part continuing gains at the end of the previous week following the release of disappointing US wage growth figures. The Goods Trade Balance, out Friday, indicated that the Trade deficit widened further.
This week is a busier one, picking up particularly on Wednesday. While the Unemployment Rate is forecast to remain unchanged at 5.1%, Average Earnings are forecast to increase to 2.0% from 1.9% previously. Slower wage growth has been among the factors leading the BOE to take a more dovish tone, so any signs of a pick-up could offer the pound some support, although any gains may not be sustainable if other announcements out this week disappoint. Attention on Wednesday will then turn to the UK’s Annual Budget, which may have implications for economic growth, inflation, and monetary policy going forward. The BOE’s March meeting culminates on Thursday. While the BOE is expected to hold interest rates at 0.50%, markets will look for any forward guidance regarding the outlook for both economic growth and inflation
EUR – The highlight for the euro last week was Thursday’s ECB meeting. While the ECB was widely expected to announce some degree of stimulus measures, including a cut to the deposit rate, the actual measures announced were more aggressive than expected. These included a cut to the deposit rate from -0.3% to -0.4%, an expansion of monthly QE purchases from €60B to €80B, an unexpected cut in the benchmark interest rate from 0.05% to 0.00%, and the purchase of corporate bonds, among other measures. The euro initially weakened against both the pound and the dollar, only to more than reverse its earlier losses during the press conference, after ECB President Draghi said that while interest rates may remain low beyond the horizon of the QE programme, there may not be any further cuts in interest rates. The ECB also released its economic growth and inflation projections through 2018. Inflation is expected to remain low in 2016, rising to an annual 0.1% before picking up to 1.3% in 2017 and 1.6% in 2018.
Following last week’s key ECB announcements, the calendar is quieter this week. The main releases of the week will be Thursday’s Final February CPI figures. Initial estimates indicated that inflation dipped to -0.2% in February from 0.3% in January, although this drop can at least partially be ascribed to a change in the base year from 2005 to 2015. Confirmation of low inflation would likely add to expectations that monetary policy in the Eurozone will remain accommodative in the near future, supporting the argument for expanding stimulus as the ECB decided to do at its meeting last week. The effectiveness of the ECB’s latest stimulus measures remains to be seen, but the euro will likely remain relatively strong in the near future given the limited weakness seen in response to the ECB’s stimulus package. Ongoing low inflation and economic growth figures may continue to pose smaller risks to euro strength.
The US economic calendar was relatively quiet last week ahead of this week’s Fed meeting. The main releases of the week were Unemployment Claims, which fell to 259K, the lowest since October, and Import Prices m/m, which fell less than forecast. Import Prices can be an indicator of inflation. With little out to support the dollar last week following disappointing wage growth figures the previous Friday, it lost ground against both the pound and the euro last week.
The main event for the dollar this week may be the culmination of the Fed’s two-day meeting on Wednesday. While the Fed is expected to hold interest rates at less than 0.50%, markets will watch closely for the Fed’s updated thinking regarding the timing of the next rate increase given recent financial market volatility, a strong labour market, and signs that inflation may be beginning to pick up. Key releases ahead of the meeting include Retail Sales, forecast to dip, and CPI figures, forecast to dip on a month-to-month basis after January’s unexpected uptick. Fed Members Dudley, Rosengren, and Bullard will speak on Friday, and markets will watch their comments for any additional forward guidance following the Fed meeting. Investors should note that the US has shifted to Daylight Savings Time and releases are out an hour earlier than usual until the UK shifts to BST on the 29th.