Week Ahead: FOMC, (another) Brexit Vote and Key Data
Fawad Razaqzada March 18, 2019 7:27 AM
This week ahead features three major central bank meetings, another Brexit vote and a handful of major economic data from around the world, keeping forex traders busy.
- No major data
While there’s nothing significant scheduled for release today, we could see European markets play catch up with Wall Street after the S&P 500 and Nasdaq hit fresh yearly highs on Friday. At the time of writing, the major EU indices were trading flat to slightly higher, but could we see more pronounced gains later, especially in light of merger news from Germany. Shares in Commerzbank (6.5%) and Deutsche Bank (4.1%) have jumped this morning after reports emerged over the weekend that their management have begun merger talks
On a more macro level, hopes over an imminent trade deal between the US and China have helped to ease investor concerns over the past couple of months. In addition, renewed dovishness from major central banks have caused government bond yields across the developed economies to fall, boosting the appeal of the higher-yielding equity markets. But it remains to be seen for how much longer the rally will continue, without a meaningful correction, given the growing list of risks facing equities, some of which we have already covered HERE.
- UK Average Earnings Index +3.2% 3m/y expected vs. 3.4% last
- Parliament Brexit Vote
- German ZEW Economic Sentiment -11.0 expected vs. -13.4
Everyone is waiting for clarity on Brexit, which unfortunately means not a lot of people are paying much attention to UK data at the moment. Tuesday’s release of wages numbers is thus likely to be shrugged off by FX traders, who instead will be paying closer attention to the developments — or lack thereof — in the House of Commons. If MPs reject Prime Minister Theresa May’s deal for the third time, there could be a lengthy delay in Brexit, else she will ask the EU for an extension of no later than June 30. Any delay will be subject to the agreement of all the other 27 EU members, who may ask for certain conditions ahead of the summit on Thursday.
- UK CPI +1.8% y/y expected and last
- NZ GDP (early Thursday NZ time) +0.6% expected vs. +0.3% last
As mentioned above, UK CPI — usually a major market-moving economic number — is likely to have minimal impact on the pound because of Brexit, especially if the actual number doesn’t deviate significantly from expectations.
The FOMC’s decision on interest rates will almost certainly be a straight forward one: no change. The Fed has recently dropped it hawkish bias, causing yields to weaken, while the Dollar Index has failed to break above last year’s high. Indeed, comments from various Fed officials since the last FOMC meeting in January have hinted at fewer projected hikes for the foreseeable future. So, the Dot plots are likely to be adjusted lower from the previous projections made in December. However, with Q1 data remaining fairly positive in some areas of the economy (while deteriorating in others), it is likely that the median may still show one hike in 2019, despite market pricing suggesting otherwise. But this is a grey area and the Fed’s forward guidance has the potential to move the dollar sharply on Wednesday.
- Aussie employment change +15.2K expected vs. +39.1K last
- SNB and BoE policy decisions
- EU summit
The Bank of England’s (BoE) hands are tied because of Brexit and they are not going to move interest rates until there’s clarity on that front, so it will likely be a damp squib of a meeting. The same could be said of the Swiss National Bank (SNB) — which has kept it its benchmark interest rate at -0.75% since early 2015 — because of a slow-growing Swiss economy.
- Eurozone Flash PMIs
- Canadian CPI and retail sales
The PMI numbers are fast becoming among the closely-followed Eurozone data, since they provide leading indication of economic health amid elevated levels of concern recently over the eurozone. Eurozone PMIs have been falling over the past several months and in February the manufacturing PMI slipped below the boom/bust level of 50, printing 49.6. If the trend continues, then this would raise the possibility of a recession in the single currency bloc and underscore the ECB’s dovish outlook. However, a surprise rebound could catch a few people off guard, leading to a potential squeeze on euro shorts. Indeed, the latest CFTC report shows large speculators remain net short on the euro, with the currency’s volatility tightening. So, a rally in EUR/USD should not come as surprise, especially given the divergence between German-US bond yields and the exchange rate.
Canadian data have been coming in mostly on the weaker side, and the Bank of Canada has subsequently dropped it hawkish bias as we had expected. The market is now on data watch, so incoming inflation and retail sales – as always – will have a direct impact on the Canadian dollar in the direction of the surprise.
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