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Week ahead: Brexit Plan B vote, FOMC and NFP

There are several potentially high-impact macro events and data to look forward to next week. Most of the macro pointers are from the Eurozone and the US, but there are also some from other regions, too. So, it could be a busy week, in particular for the EUR/USD pair. We also have the much-anticipated vote on Theresa May’s revised Brexit plan. This also has the potential to move the EUR/USD exchange rate, although it will likely have a much bigger impact on the GBP/USD and other pound crosses.

UK parliament set to vote on PM May’s Brexit Plan B

The UK parliament must decide on Tuesday whether to approve Prime Minister Theresa May's revised Brexit plan. We are still not sure what exactly the PM’s revised plan looks like and there have been suggestions that it is not going to be too dissimilar to her initial proposal, which was rejected overwhelmingly last time. In the likely event the parliament doesn’t approve it, uncertainty will remain elevated. But no one is quite sure what a defat will mean for the Brexit process and how the pound may respond. While on the one hand it will technically increase the chances for a no-deal Brexit, which would be a bad outcome for sterling, another potential defeat for the PM would also boost the prospects of a second EU referendum, which we think would be positive. Unless Mrs May’s deal surprisingly passes the vote, in which case the pound could absolutely surge higher, the currency may instead whipsaw sharply when the outcome of the vote is announced. Sterling has been going higher over the past several weeks as investors continue to expect there will be a delay in Britain’s official departure date of March 29. It is expected that the potential delay will either give rise to a second EU referendum or a soft exit from the EU, which is the default position of the UK parliament.

Look ahead: data highlights

  • Tuesday: UK Parliamentary vote on Brexit Plan B; US Consumer Sentiment (CB)
  • Wednesday: Aussie and German CPI; ADP and FOMC
  • Thursday: Eurozone GDP; US core PCE price index, employment cost index and personal spending
  • Friday: Caixin Chinese manufacturing PMI; Eurozone CPI and US NFP

Eurozone CPI and GDP could provide direction for EUR/USD

The EUR/USD extended its decline after the European Central Bank meeting on Thursday. Though the central bank made no changes in its policy, as expected, Mario Draghi, the ECB President, noted that the risks to the economic outlook have “moved to the downside,” and seemed overall a tad more dovish than he was in the previous meeting, as my colleague Matt Weller reported HERE. However, as a dovish ECB was already expected, the EUR/USD’s losses were limited, and it was already back above the 1.13 handle to trade beyond 1.1350 when this report was written on Friday morning. Will next week’s Eurozone data show a surprise recovery to help underpin the exchange rate, or will we see further deterioration and more weakness for the EUR/USD?

German Consumer Price Index (CPI) will be released on Tuesday, a few days ahead of the Eurozone inflation data on Friday. With Germany being the largest Eurozone economy, the nation’s CPI will provide us a strong clue in terms of what to expect from the single currency bloc on Friday. Eurozone CPI has been trending lower ever since it hit a peak of 2.2% y/y in October. By December, headline CPI had eased to just 1.6%, although core CPI remained stabled around the 1% level. The recent weakness in oil prices point to subdued inflationary pressures for January, too.

Meanwhile, GDP will be the other important Eurozone data to watch on Thursday. Growth in the single currency bloc has missed the mark in each of the past two quarters. In the third quarter of 2018, GDP barely expanded as it printed a meagre 0.2% increase. Given the recent soft patch in German data, we are not expecting to see a sizeable rebound in eurozone growth. But that is also what the market may be expecting. Thus, the bigger risk would be if GDP surprises to the upside and we see the euro shoot higher.

If the latest Eurozone data show further sharp weakness, in particular the inflation numbers, then the euro may extend its decline as investors push their ECB rate hike expectations further. However, if inflation and/or GDP reveal surprisingly strong readings, then the market may start believing the ECB again and price in a rate increase for Q4. In this case, the euro could push higher.

Nonfarm payrolls among US data highlights

There will be plenty of US data to look forward to next week, not least Friday’s nonfarm payrolls (NFP) figures. The jobs market continues to remain exceptionally strong in the US, and we don’t expect that to change for at least a few more months. However, the other parts of the US economy may start to deteriorate soon as the ongoing weakness in China and other emerging market economies, as well as the Eurozone, may weigh on US exports. The impact of the past tax cuts is also diminishing.

Ahead of the NFP, there will be a few other important US data scheduled for release earlier in the week. These include CB Consumer Sentiment (Tuesday), ADP private sector payrolls report (Wednesday) and Core PC Price Index, Employment Cost Index and Personal Spending (all on Thursday).

As can be seen, apart from the ADP there aren’t plenty of pre-NFP leading indicators scheduled for next week. Both the ISM manufacturing (Friday) and services (next Tuesday) PMIs will be released after the NFP. So, we won’t have the leading employment components of these two important sectors to take into account, which makes the NFP very difficult to predict on this occasion – was it ever easy?

FOMC could be a dump squib

In addition to the above data, the Federal Reserve will be concluding its monetary policy meeting on Wednesday. While no interest rate change is expected, Fed Chair Jerome Powell’s remarks at the FOMC press conference will be scrutinised closely for clues on future policy changes. Given the fact that the FOMC has indicated that rates won’t be going up again soon, investors will be keen to find out how long will the Fed remain on hold, and whether it would consider cutting rates given the elevated level of risks facing the US economy this year and the fading impact of the tax-cut boom.

Other macro events to watch

Among the other majors, the Aussie will probably be among the more interesting currencies to watch for development. As well as Australian quarterly CPI data on Wednesday, we will also have the latest Caixin Chinese manufacturing PMI on Friday. Both figures have the potential to move the Aussie sharply, given that China is Australia’s largest trading partner. Don’t forget that US company earnings are also coming in thick and fast, and they have the potential to either help accelerate the stock market recovery, of if we see a run of bad numbers, undermine risk appetite.


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