Week Ahead
 | 12/11/2018

November 12th to 16th | Markets after the Midterms and the FOMC

As the new week enters, Brexit tensions seem to be rocking the pound as the negotiations could be characterized as slow but focused on the objective of reaching a deal. On the other hand the split in the inner UK political scene seems to deepen day by day as PM Theresa May seems to be losing support for her Brexit plans. Across the Atlantic, the mid-term elections are over and the market seems to have processed the results as a more hawkish Fed could be leading the USD. In the Euro area the Italian budget issue could be lingering as judgement day is near. The Aussie expects the employment data while the Japanese economy could be marking one of its widest contractions for some years. For all of that let’s have a closer look.

USD- Could continue to feed on hawkish Fed and uncertainty.

The USD seems supported against its major counterparts by expectations of further monetary tightening by the Fed. Expectations grew as on Thursday the bank was quite hawkish reaffirming its intentions for further rate hikes. The greenback also gained due to the interest rate differentials of the Fed with other central banks, according to analysts. After the midterms and as the market seems to have digested the results, we could see the US Dollar making gains also in its role as a safe haven, as the Chinese economy seems to slow down and the US-Sino trade frictions continue to affect the market.

On the financial releases side the USD may experience another rollercoaster ride this week. The main release would be the inflation rates for October, on Wednesday where the headline rate’s possible acceleration (forecast: +2.5%yoy vs prior: +2.3% yoy) and simultaneously the core rate is forecasted to remain unchanged (forecast: +2.2% yoy vs prior: +2.2%yoy) could provide some support for the USD as it would indicate that inflationary pressures continue to exist in the US economy after September’s rate hike and hence provide further arguments for the bank’s monetary tightening policy. Also, a possible acceleration of the retail sales growth rate (forecast:+0.5% mom vs. prior:+0.1% mom) for October, could provide support for the greenback as it would reaffirm that the average consumer feels comfortable and able to spend more in the US economy. On the other hand, a possible deceleration for the US industrial output growth rate in October, albeit slight may shake the confidence in the prospects of the US industrial sector. The same could be said for the Philadelphia Fed Business Index which is also expected to drop (forecast: 21.0 vs. prior: 22.2) on Thursday.

GBP- Brexit and bullish financials

UK’s fundamentals are expected to be dominated once again by Brexit headlines. It should be noted that the Irish border issue remains unresolved and threatens the ongoing negotiations. With the negotiations progressing slowly but steadily towards a solution, market focus seems to be shifting to the inner political scene of the UK. The main risk factor on this issue currently, seems to be whether UK’s PM Theresa May, will be able to pass any deal agreed with the EU through UK’s parliament. The much needed for a parliamentary majority DUP is sending out negative signals and hard Brexiteers seem to be firming their stance, but the government could start adding up pressure to fold back in line, as decision making time is approaching.

The pound’s direction could also be influenced this week by the financial releases. Beginning with the release of UK’s employment data for September on Tuesday the pound may find some support as the unemployment rate is expected to remain unchanged (forecast: 4.0% vs. prior: 4.0%) at rather low levels for UK standards, the employment change figure is expected to rise (forecast: 34k vs. prior:-5.0k) and the average earnings (+Bonus) growth rate expected to accelerate (forecast: +3.0% yoy vs. prior: +2.7% yoy), showing a rather tight UK labor market and possible inflationary pressures. Such inflationary pressures could be confirmed should the core CPI (forecast: +2.0% yoy vs. prior: +1.9% yoy) and the headline CPI rate (forecast: +2.5% yoy vs. prior: +2.4% yoy) accelerate as expected on Wednesday, as such an acceleration could add pressure on the BoE for a more hawkish view on the economy. Support for the pound could also be provided on Thursday as the retail sales growth rate for October is forecasted to accelerate (forecast: +0.2% mom vs. prior: -0.8% mom) and is expected to get out of the negative area and show growth again.

EUR- Political frictions in Italy and financial releases to set course

The euro could be affected by the Italian budget issue this week, as sanctions against Italy could be set by the EU council. Should there be sanctions against Italy, further turmoil could be present for the EUR, with the main scenario involving the bears. The issue gets even thornier as the GDP growth rate for 2019 could be lower than what the Italian government expects.

A number of financial releases could be sending mixed signals for the common currency. Starting on Tuesday with the release of Germany’s ZEW economic sentiment indicator for November, we could see the common currency slipping as the indicator’s reading is expected to drop (forecast:-25.0 vs. prior:-24.7) indicating the deepening pessimistic view of the German businesses. The effect could be magnified as the German ZEW current conditions indicator is also forecasted to drop (forecast: 65.0 vs. prior: 70.1). Bad news could be continuing for the common currency on Wednesday, as Germany’s preliminary release of the GDP growth rate for Q3 is expected to slow down (forecast: -0.1% qoq vs. prior: +0.5% qoq) and show a small construction for the largest economy of the Eurozone. Despite the deceleration of Germany’s GDP rate, Eurozone’s preliminary GDP growth rate for Q3 is expected to remain unchanged (forecast: +1.7% yoy vs. prior: +1.7% yoy) and could provide some comfort. Last but not least, on Friday Eurozone’s final release of the CPI rate for October (forecast:+2.2% yoy vs. preliminary:+2.2% yoy) could provide some support for the single currency, as it is expected to remain unchanged in comparison with the preliminary release and above ECB’s target of +2.00% yoy.

AUD- Australia’s employment data and Chinese industrial output could provide direction for the Aussie.

After the gains the Aussie had over the past week over the USD, we could start seeing a reversal this week as the AUD is considered a close proxy of the Chinese Yuan. Should there be further headlines about tensions of the US-Sino trade relationships we could see the AUD weakening. On the financial releases side and starting with the release of the Chinese industrial output growth rate for October, news are not so good as the rate is forecasted to slow down to +5.7% yoy, if compared to previous month’s reading of +5.8% yoy. Should the actual rate meet its forecast we could see the Aussie weakening, as the Australian economy has a large exposure in the Chinese one and the forecasted outcome is one of the lowest since 2016. Some comfort could be provided as the wage price index is expected to accelerate (forecast: +2.3% yoy vs. prior: +2.1% yoy), the employment change figure is forecasted to rise (forecast: 20k vs. prior: 5.6k), while the picture of an overall tight labor market is blurred a bit by the rise of the unemployment rate (forecast: 5.1% vs. prior: 5.0%).

JPY- Unfavorable financial data could set a bearish mood for the JPY

JPY could be in for a rough week, as the financial releases are forecasted to be unfavorable for the Yen. Starting with the release of the preliminary GDP growth rate for Q3, the rate is forecasted to slow down and drop into the negatives (forecast: -0.3% qoq vs. prior:+0.7% qoq). Should the actual rate meet its forecast, the slowdown would be substantial and the rate would hit its lowest reading in over two years, strengthening arguments about the negative side effects of BoJ’s current ultra-lose monetary policy. The slowdown is also supported at the year on year level (forecast:-1.0% yoy vs. prior:+3.0% yoy), where the slowdown is forecasted to be even more intense and the contraction is expected to hit also one of the lowest levels in over two years. It should be noted that the yen could also weaken as also the industrial production is expected to keep contracting (forecast:-1.1% mom vs. prior:-1.1% mom) for a second month in September