FX Markets Have Busy Week with UK & US CPI, Plus BOE, ECB, & FOMC
- Five central banks are meeting this week: the Federal Reserve, Bank of England, the European Central Bank, the Swiss National Bank, and Banxico.
- The policy meeting most likely to bring a significant price movement to FX markets is the FOMC on Wednesday with its new Summary of Economic Projections.
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12/12 Tuesday | 09:30 GMT | GBP Consumer Price Index (NOV)
The British Pound’s post-Brexit base effect weakness has worked its way out of markets, but its influence will linger at the upcoming inflation release, as anticipated by the Bank of England at their October and November policy meetings. Consensus forecasts are calling to see price pressures increase by +0.2% from +0.1% (m/m) and +3.0% unch (y/y). Likewise, Core CPI is expected to hold at +2.7% (y/y).
Unlike inflation reports in previous months, the upcoming data release doesn’t hold much importance for the Sterling in the near-term. Even as BOE policymakers have warned that headline CPI could stay over +3% through the middle of Q4’17, the November rate hike was a one-off event; it was not the beginning of a rate hike cycle. Inflation will need to persist above +3% through the end of 2017 and into early-2018 if rates markets are going to pull forward the timing of the next hike – currently pegged at September 2018.
12/13 Wednesday | 13:30 GMT | USD Consumer Price Index (NOV)
According to a Bloomberg News survey, US consumer prices were higher on a monthly-basis in November, due in at +0.4% from +0.1% (m/m) and +2.2% from +2.0% (y/y). The core readings should be similar, at +0.2% unch (m/m), and at +1.8% unch (y/y). These figures aggregately have started to steady near the Fed’s medium-term target, further confirming that the Fed will raise rates later on in the day. The risk is that the data misses and another check goes into the ‘disinflation’ column that policymakers are worrying about. A weak CPI report on Wednesday would raise the odds that the FOMC downgraded its economic projections on Wednesday.
12/13 Wednesday | 19:00 GMT | USD Federal Reserve Rate Decision and Press Conference
The Federal Reserve’s December policy meetingwill bring a 25-bps rate hike with it, although that much information is already priced-in to rates. Given that it is a meeting with a press conference and a new Summary of Economic Projections (SEP) meeting, odds are high that this meeting brings with it far more volatility than the one in November. Given recent commentary from Fed officials, there is a non-zero possibility that the 2018 inflation forecast, and thus, the glide path of interest rates (the ‘dot plot’) are lowered as well. Even though rates markets aren’t pricing in the next hike until June 2018, any sign that the Fed is once again losing faith in their own projections would prove troublesome for the US Dollar.
12/14 Thursday | 12:00 GMT | GBP Bank of England Rate Decision
The December policy meeting will see Bank of England take a much less exciting approach than last month, when an update to the MPC’s Quarterly Inflation Report was released. Accordingly, without explicit forecasts due, no policy measures are expected to change. For now, with Brexit uncertainty looming large,there seems little reason to think that last month’s rate hike was anything other ‘one-and-done.’ Guidance on the future path of rates will be the key factor for the British Pound, if it appears at all. Rates markets are currently pricing in September 2018 as the most likely period for the next rate move.
Pairs to Watch: EUR/GBP, GBP/JPY, GBP/USD
12/14 Thursday | 12:45 GMT | European Central Bank Rate Decision
With the December policy meeting being one of the four meetings during the year that new staff economic projections (SEP) are released at, there is a strong possibility that the ECB revises its growth and inflation forecasts for 2018, and given where the aforementioned indicators stand, the risk is for a positive surprise – upside adjustments to both the GDP and CPI projections.
While the ECB seems to be following the Fed’s playbook (taper the QE program, allow some time at low rates without additional stimulus, then raise rates after a small adjustment period), implicitly, any upwards revision to the SEP will bring with it speculation that the ECB may taper their QE program faster than currently outlined, highlighting the potential for a rate hike to transpire sooner than what the market is currently pricing in (the second half of 2019 at the earliest).
Pairs to Watch: EUR/GBP, EUR/JPY, EUR/USD
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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