FX Markets Wait on UK GDP, Euro-Zone Inflation, and FOMC Minutes
- Inflation data from Europe to show that the region still has an uphill battle to climb out of its economic trough.
- FOMC minutes to show question of a 25-bps rate hike is a question of ‘when,’ not ‘if.’
- Canadian inflation data to leave little room, one way or the other, for the Bank of Canada to act.
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02/22 Wednesday | 09:30 GMT | GBP Gross Domestic Product (4Q P)
The second look at UK GDP will give investors more insight into the strength of the UK in the last three months of 2016 and may well surprise to the upside again. The first look at UK growth showed the economy growing at 0.6%, beating analysts’ expectations of +0.5%, making the UK the fastest growing economy in the G7 during 2016. And with recent better-than-expected industrial production and construction output data, some analysts’ have mooted a further upgrade to +0.7% on Wednesday. Howard Archer, chief UK and European economist at IHS Markit notes that while industrial production and construction output only account for 14.6% and 5.9% respectively of GDP, taken together the upwardly revised performances add 0.0497% to GDP growth in the fourth quarter. In addition, the ONS estimates that the dominant UK services sector expanded by +0.8% q/q in the fourth quarter, while the service sector PMI for December showed economic activity at a 17-month high. At the November Inflation Report, BOE governor Mark Carney, upped the central bank’s growth forecast for 2017 to 1.4% from 0.8% three months earlier, the largest ever upgrade by the bank.
02/22 Wednesday | 10:00 GMT | EUR Euro-Zone Consumer Price Index (JAN)
Inflation remains stubbornly low in the Euro-Zone, despite near-term advances on the headline CPI figures. European Central Bank Mario Draghi, in the central bank’s meeting in January, made clear that any near-term advances in inflation were being looked through, or in other words, dismissed as a short-term aberration. The divergence between core (+0.9% y/y) and headline (+1.8% y/y) figures is largely due to base effects stemming from oil prices over the past year, not necessarily a sign that aggregate demand is picking up in the Euro-Zone. The monthly reading is due to show a significant decline (-0.8% m/m), reinforcing the notion that the ECB will need to keep its policy accommodative throughout 2017.
02/22 Wednesday | 19:00 GMT | USD FOMC Jan 31-Feb 1 Meeting Minutes
The minutes from the Federal Reserve’s first meeting of the year will likely showcase the cautious optimism US policy officials have over their ability to normalize rates further this year. Against a backdrop of “full employment” and inflation pressures starting to poke their head above the Fed’s medium-term +2% target, a 25-bps rate hike seems to be more of a question of ‘when’ rather than ‘if.’ Per Fed Chair Janet Yellen’s commentary at the Humphrey-Hawkins testimony last week, "Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession." What could bring about a rapid jump in rates?- if President Trump’s fiscal stimulus plans come to fruition sooner than currently being priced in. While we don’t expect to hear from the Fed about specific contingencies around President Trump’s fiscal reforms, a discussion in the abstract should still have transpired.
Pairs to Watch: EUR/USD, USD/JPY
02/24 Friday | 13:30 GMT | CAD Consumer Price Index (JAN)
Canadian inflation is expected to remain below the central bank’s target in 2017 as the economy struggles to grow. At the Bank of Canada’s recent quarterly Monetary Policy Meeting, the central bank left rates unchanged at 0.5%, while the report implied little chance of an interest rate hike in 2017. Indeed policy makers said a rate cut remains live as the central bank looks to boost consumer-led growth. Inflation year-over-year was reported at 1.5% in December, missing the central bank’s 2% target, while retail sales rose a mere 0.2%, according to statistics Canada.
The recent trip by Canadian Prime Minister Justin Trudeau to Washington to meet US President Donald Trump, was seen as successful with the Canadian PM seen strengthening economic ties with the new White House incumbent. The US buys around 75% of Canada’s exports and any fears over President Trump renegotiating the North American Free Trade Agreement would have had severe consequences on Canada’s already fragile economic outlook.
--- Written by Christopher Vecchio, Senior Currency Strategist, Nick Cawley, Analyst
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