FX Markets Look to CPI from UK & US, BOC & ECB, Chinese GDP
- After a quiet economic calendar last week, there are significantly more events with greater event risk this week.
- Inflation data from UK on Tuesday, as well as UK PM May’s Brexit speech, should keep volatility in GBP-crosses running higher.
- Trump’s inauguration on Friday marks the dawn of a new era of fiscal and monetary policy across the developed world, unseen in the wake of the GFC of 2008/9.
01/17 Tuesday | 09:30 GMT | GBP Consumer Price Index (DEC)
The final figure of 2016 and likely to exceed November’s year-on-year figure of 1.2% with analysts looking for a tick-up to +1.3% as sterling’s weakness continues to feed through into the economy. And, according to Bank of England governor Mark Carney, inflation is likely to continue to rise, approaching the central bank’s target of near to +3% within 18-months.
At the last Inflation Report in November, governor Carney said that CPI will hit +2.75% in mid-2018 before beginning to fall back gradually thereafter. He added that this “implies a more challenging trade-off between returning inflation sustainably to the target on the one hand and supporting real activity on the other,” adding fuel to analysts’ expectations that the next move in UK interest rates would be up, unless Brexit developments stall the economy. And later on Tuesday, the market may get more of an idea of the UK’s approach to leaving the EU.
01/17 Tuesday | 11:00 GMT | GBP UK PM May Gives Speech on Brexit Approach
The UK Prime Minister will make a closely watched speech Tuesday, setting out the government’s position and goals over the upcoming Brexit negotiations. In December the PM said that she would publish more information on the government’s approach to Article 50. PM May’s official spokeswoman said that she will be making a speech on Tuesday, “setting out more on our approach to Brexit, as part of preparing for the negotiations and in line with our approach for global Britain and continuing to be an outward-looking nation."
Market participants will look for any clues as to whether the UK will pursue a ‘soft’ or hard’ Brexit. A ‘hard’ Brexit would see the UK losing access to the EU and reverting to WTO trade rules. A ‘soft’ approach would see the UK retaining a closer relationship with the EU while accepting the 'four pillars' of free movement of goods, services, capital and labor. PM May has previously said that the UK wants to regain control of immigration while EU leaders continue to say that the ‘four pillars’ are red lines and cannot be crossed. After the contents of her speech were leaked over the weekend resulting in the British Pound gapping lower at the start of the week, it seems markets may be pricing in her speech to be strictly of the ‘hard Brexit’ variety.
01/18 Wednesday | 14:00 GMT | CAD Bank of Canada Rate Decision
With the Bank of Canada taking a neutral stance at its December meeting, some analysts were questioning whether or not policymakers were not dovish enough. However, after weeks of better than expected trade and investment data, as well as a sustained turn higher in energy prices since November, it now seems that the BOC’s more neutral tone is appropriate, and should be reflected as much in the policy statement. While the BOC will likely speak poorly of the recent rise in short-term rates – a knock-on financial tightening effect thanks to the jump in US yields after the US elections in November – the BOC isn’t likely to take any substantive action. Concerns linger about energy-related investment, and labor market growth was anything but steady over the course of 2016. Governor Stephen Poloz’s conference should try to balance out what may be seen as a hawkish policy statement due to its optimism over near-term developments. Volatility, if not direction, should result for CAD-crosses.
01/19 Thursday | 12:30 GMT | EUR European Central Bank Rate Decision
Given that it is a) the first meeting after they just changed policy in December 2016 and b) that there are now new staff economic projections (SEPs) due on Thursday, the scope for the European Central Bank to act at this meeting, one way or the other, seems very limited.
ECB President Mario Draghi is likely to balance out his optimism over near-term economic data against longer-term concerns about the political scene in Europe and inflation that remains barely positive.If data continues to improve, we would expect that market pressure on the ECB to back away from its most aggressive easing policies would increase. One year from now, market participants think that the ECB will be closer to a rate hike (17.5% chance at the January 2018 meeting) than a rate cut (13.4%).
Yet to do so, we believe that the ECB will need to see a meaningful improvement in actual inflation readings; the latest ECB forecasts see inflation ending 2017 at +1.1%. If this proves reality, then the ECB might opt for another tweak in its policy, extending the length of its QE program but reducing the pace of purchases.
Any such announcement would come at a meeting with a new set of SEPs, which come in March, June, September, and December. Accordingly, the coming ECB meeting on Thursday may bring a lot of hype, but it seems very likely to be a rather neutral meeting that may not wing the pendulum of understanding about the ECB’s next move.
Pairs to Watch: EUR/USD, EUR/GBP
01/20 Friday | 02:00 GMT | CNY Gross Domestic Product (Q4’16)
The Chinese economy is expecting to expand by +6.7%, year-on-year, in the fourth quarter, in-line with readings for the first three quarters of 2016. For 2016, the Chinese government is targeting the economy to grow between +6.5% and +7.0%. A year earlier, the economy expanded by 6.9%, the weakest growth rate since 1990. Chinese growth is currently being fueled by increased government expenditure while the export industry will see a boost from the weaker Yuan which dropped from around USDCNY 6.69 to 6.98 in the last three months of 2016.
--- Written by Christopher Vecchio, Senior Currency Strategist, Nick Cawley, Analyst
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