5 key events

US Dollar, British Pound May Find Strength in Fed Rate Decision, Q4 GDP

The US dollar will face heavy event risk in the coming week, as the Federal Reserve will announce their latest rate decision and Q4 GDP may reflect the fastest pace of growth since Q3 2006. The Reserve Bank of New Zealand will also be making a rate decision, and New Zealand dollar trade is likely to be volatile in light of the release. Additionally, traders should watch for the impact of UK Q4 GDP on the British pound and Australian CPI on the Australian dollar.

•    UK Gross Domestic Product (GDP) (4Q A) – January 26, 4:30 ET
Has the UK finally started to emerge from recession? Traders will get a better official sense on Tuesday as the advance reading of Q4 GDP will be released. The quarterly rate is projected to rise for the first time since Q1 2008 by 0.4 percent, while the annual rate is anticipated to improve to -3.0 percent from a near-record low of -5.1 percent. Overall, there are some upside risks for this report, as the purchasing managers’ index (PMI) for both the services and manufacturing sectors held above 50 and hit two-year highs in October, November, and December, indicating an expansion in activity. On the other hand, PMI for the construction sector continues to reflect a contraction in activity, albeit at a slower pace than at any other point of the recession. All told, any positive quarterly GDP result should yield a very strong reaction from the British pound, and this is the most probable outcome. However, if the figure continues to signal a contraction in the UK economy, the currency could drop sharply on speculation that the BOE will have no choice but to expand their quantitative easing program next month.

•    Australian Consumer Price Index (4Q) – January 26, 19:30 ET
The pace of growth in Australia's headline consumer price index is forecasted to have slowed to 0.4 percent during Q4, down from the 1.0 percent rate we saw in Q3. However, the annual rate is projected to accelerate to 2.0 percent from 1.3 percent, and the Reserve Bank of Australia’s core measures are projected to remain at more robust levels as well. The annual trimmed mean is anticipated to hold at 3.2 percent while the weighted median is forecasted to slip to 3.5 percent from 3.8 percent. All told, such moves would tell us that the rebound in demand fizzled out at the end of the year, which may cut into rate expectations for the RBA. At the time of writing, Credit Suisse overnight index swap rates were pricing in a 67 percent chance of a 25 basis point increase by the RBA during their next meeting on February 1, but stronger- or weaker-than-expected consumer prices could lead to a quick shift in these rates, as well as the Australian dollar.

•    Federal Open Market Committee (FOMC) Rate Decision – January 27, 14:15 ET
At 14:15 ET on Wednesday, the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, and according to the futures market, this should remain the case until the end of Q3 2010. In fact, the FOMC started saying in January 2009 that they continue “to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” and they’ve gone on to repeat this since then. That said, any removal of this statement would likely yield a sharp rally in the US dollar. Additionally, traders should watch for comments on the economy. The FOMC has become progressively optimistic on their outlook, and a continuation of this trend should translate into US dollar strength. On the other hand, signs that the Committee is concerned about the potential impact of the wavering banking sector, or indications that they may extend their quantitative easing program are likely to weigh heavily on the currency.

•    Reserve Bank of New Zealand (RBNZ) Rate Decision – January 27, 15:00 ET
The Reserve Bank of New Zealand (RBNZ) is still anticipated to leave the Official Cash Rate target unchanged for the sixth straight meeting at 2.50 percent. In RBNZ Governor Alan Bollard's last policy statement on December 10, he essentially left the door open to rate hikes as soon as Q2 2010 by saying, “If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010,” while tight financial conditions stemming from “a higher exchange rate, increased long-term interest rates and a wider gap between the OCR and bank funding costs” had reduced the need for “more immediate action.” Given the weaker than expected Q3 GDP results we saw in December and the surprise contraction in quarterly inflation figures we saw this past week, the RBNZ isn’t likely to become more hawkish. Instead, traders are likely to see a markedly neutral policy statement that either doesn’t have a big impact on the New Zealand dollar, or weighs the currency down.

•    US Annualized Gross Domestic Product (GDP) (4Q A) – January 29, 8:30 ET
On Friday, evidence may indicate that the Federal government’s economic stimulus efforts helped the US close out the year with a Q4 GDP rate of 4.5 percent, the fastest pace of growth since Q1 2006. Putting things into perspective, this compares to the 6.4 percent contraction we saw in Q1 2009. All told, many are looking for consumption and exports to be prime drivers of the expansion. A GDP reading of 4.5 percent or higher is likely to trigger heavy buying of the US dollar, but if the figure proves to be much weaker than expected, the currency could drop sharply.

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

Send questions or comments to tbelkas@dailyfx.com

FXCM supports Haiti relief. To learn more information or donate to the cause: http://www.haitichildren.com/donation
 

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

Resources

• free demo account
• forex courses
• open an account
• real time news
• free webinars