Week Ahead
 | 17/12/2018

December 17th to 21st | Brexit, FOMC interest rate decision as well as BoJ and BoE in focus.

The fundamentals of this week could include further developments regarding Brexit and the US Sino trade relationships, however the markets could have their attention turned to the financial releases of this week. The current week’s financial releases, are expected to be dominated by a number of interest rate decisions, with the predominant one being the FOMC’s decision from the US on Wednesday. It should be noted, that a number of other releases regarding inflation rates and other financial data, could grab the market’s attention as well. For all of that and then some, let’s have a closer look.

USD- Is the expected rate hike going to support the USD?

The USD fundamentals could include any further developments in the US-Sino relationships, as US president Trump tweeted over the weekend, implying that the two sides could be closer to an agreement. However the market’s attention is expected to be concentrated in the Fed’s interest rate decision announcement on the 19th of December. The bank is widely expected to hike rates by 25 basis points, reaching a level of +2.5%. Currently Feds Funds Futures tend to support such a scenario as they imply a probability of 74.7% for it. Under normal circumstances, a rate hike by the FOMC could provide support for the USD, however things may be different this time. Growing uncertainty and soft economic data of the US economy, could be advising caution for the FOMC. Also, Fed Chairman Powell’s recent comment that the Fed’s interest rate level, may be nearing a neutral level, could be interpreted as rather dovish. We see the case for the bank to hike rates once again in the upcoming meeting, however the accompanying statement, the following press conference and the dot plot, could be the decisive factors for the USD in the meeting. Should the Fed imply fewer rate hikes in the future (2019), or should a more dovish tone prevail over the accompanying statement and the following press conference, the USD’s bullish outlook could be undermined by a disappointed market. The same should apply in case the Fed forecasts weaker growth or a softer inflation rate. On the other hand should the bank sound firm in its prior forecasts and rate hike path for 2019 we could see the USD strengthening. Please be advised that increased volatility, could affect USD pairs across the board, not only at the time of the release but also during the following press conference. However we expect the financial releases affecting the USD, in the current week to also be closely monitored. Highlights of US financial releases could include the Philly Fed manufacturing Index (forecast:15.0 vs. prior:12.9), the final release of the final GDP growth rate (forecast:+3.5% qoq vs. preliminary:+3.5% qoq) and the final Michigan Consumer Sentiment (forecast:97.5 vs. preliminary:97.5). Also USD traders could be having a look out on Friday, for the release of the PCE rates for personal consumption and inflation (Fed’s favourite).

GBP- Brexit and BoE interest rate decision in focus.

With the prior week ending and Theresa May not getting any support from EU leaders, the UK seems to be in a political chaos. UK politics seem to keep open any number of cases regarding Brexit as a new referendum is clearly being asked for from a number of politicians, despite Theresa May opposing such a scenario as a breach of trust. A more far-fetched scenario would be the a Brexit vote by the UK parliament this week, as practically the weekend has shown that no substantial changes to the existing draft deal could be expected. As Brexit uncertainty keeps the pound under pressure, financial releases could increase volatility causing the bearish outlook to weigh even further. Starting with the BoE interest rate decision, the bank is expected to maintain its current level of interest rates of +0.75% and GBP OIS currently imply a probability for 99.9% for such a scenario, rendering the interest rate decision an open and shut case. We do not expect any substantial changes from the BoE, however a more cautious tone could be struck in the accompanying statement as the risk of a hard Brexit seems to be fueled by the uncertainty surrounding it. Also the release of the CPI rates for November, could add to the bearish outlook for the pound as they are forecasted to slowdown (Headline CPI rate, forecast:+2.3% yoy vs. prior:+2.4% yoy), while the release of the retail sales growth rate could provide some support (forecast: +0.2% mom vs. prior: -0.4% mom), ahead of the BoE interest rate decision announcement. Overall, we see the case though for the pound to remain under pressure as noted above, as long as the uncertainty surrounding Brexit continues.

JPY- BoJ interest rate decision and CPI data to influence JPY’s direction

The Yen could be in for a difficult week, as for financial releases. The release of the trade balance figure for November on Wednesday, may predispose Yen traders as it is forecasted to drop even further into the negative area, widening the deficit (forecast: -600.3 B vs. prior:-449.3B). The bearish scenario could be gaining even more ground, as the BoJ is expected to remain on hold at -0.10% the next day and JPY OIS, currently imply a probability of 99.36% for such a scenario. We expect no substantial change in BoJ’s language in the accompanying statement and we see the case for the bank to maintain its current ultra-loose monetary policy. With the Core inflation rate expected to remain stuck at +1.0% yoy (to be released on Friday) and the GDP growth rate in the negative area, it will be difficult for the bank to escape its dovish policy in the near future.

CAD- Inflation data and Friday’s releases to affect the Loonie

After a dovish tone being struck by the BoC, in its last interest rate decision a bearish background is in place for the Looney. Such a sentiment could be enhanced by the release of Canada’s inflation data for November (Headline CPI rate, forecast: +1.9% yoy vs. prior: +2.4% yoy), due out on Wednesday, as the forecasted slowdown is substantial and should it be realized, could weigh on the future outlook of the BoC. At the end of the weak though the Loonie could be getting some support though, as the retail sales growth rates are expected to accelerate (Headline Retail Sales, forecast: +0.3% mom vs. prior: +0.1% mom) and the GDP growth rate is also expected to accelerate (forecast: +0.2% mom vs. prior: -0.1% mom) and getting out of contraction.

NZD, AUD- Bearish data ahead

The fundamentals surrounding the Kiwi and the Aussie could include any further developments regarding the US-Sino trade relationships as their respective economies have a great exposure to China. Any indications of a possible softening could improve the risk sentiment and hence provide support for the two commodity currencies. The financial releases, affecting the two currencies though, could enhance a possible bearish sentiment in the coming week. The release on Tuesday, of the minutes of RBA’s last meeting could influence the Aussie’s direction, but one could argue that as the release of the interest rate decision itself draw little attention, the minutes could serve to provide further insight regarding the bank’s intentions and outlook. On the other hand, the release of the Australian employment data for November, could strengthen any bearish tendencies, as despite the unemployment rate remaining at low levels (forecast: 5% vs. prior: 5%) the employment change figure is forecasted to drop substantially (forecast: +20.0k vs. prior: +32.8k). Across the Tasman sea, the release of New Zealand’s GDP growth rate for Q3 could provide worries for the Kiwi, as the rate is expected to slow-down substantially (forecast: +0.6% qoq vs. prior: +1.0% qoq). The slowdown could overshadow also the release of the New Zealand’s trade balance figure.

EUR, SEK and CZK-Bearish data and central bank interest rate decisions.

From the Eurozone the bad news for the common currency may continue, after the release of the preliminary PMI’s for December, on Friday, which were considered as weak. We start the week, with the final release of the HICP rate for November (forecast: +2.0% yoy vs. preliminary: +2.0% yoy) which is expected to remain unchanged if compared to the preliminary release, yet lower than October’s final release (October: +2.2% yoy) creating a bearish predisposition. The bearish sentiment could be enhanced the following day as Germany’s Ifo business climate indicator for December is also forecasted to drop (forecast: 101.7 vs. prior: 102.0), indicating a more pessimistic view about the prospect of the German economy in the next six months. The common currency could remain under pressure throughout the week as on Friday, Eurozone’s consumer confidence indicator December is expected to drop. On the north shores of the Baltic Sea, Sweden’s Riksbank is about to deliver a very interesting, interest rate decision. The bank is expected to remain on hold at -0.50% and currently SEK OIS imply a probability of 80.57% for such a scenario. The recent setbacks of the inflation rates and the GDP growth rate being lukewarm at their last releases, concur for the bank to retain a wait and see position. We could see the bank remaining on hold and providing an optimistic view for the Swedish economy, with a number of hawkish elements, in order to pave the way for a rate hike in its next meeting and in such a scenario, the SEK could get some support. On the contrary should the bank remain on hold and keep a more cautious stance, we could see the SEK weakening. It should be noted though that risks seem to be tilted to the upside, as some analysts continue to see the case for the bank to hike rates in the upcoming meeting.

Last but not least, the Czech National Bank is about to release its own interest rate decision on Thursday. Currently the bank is expected to remain on hold at +1.75%, after hiking rates four consecutive times and currently CZK OIS, imply a probability for such a scenario of 66.73%. With the CPI rate remaining unchanged at +2.0% yoy in November, however slowing down on a month on month basis, reaching the negatives (Nov.: -0.1% mom vs. Oct: +0.4% mom), caution would be advisable. On the other hand the GDP growth rate, retail sales and Industrial production seem to be picking up, while unemployment remains at low levels and if combined could lead to a surprise rate hike by the CNB.