FX Markets Eye Eurozone and US Inflation, US and Canadian GDP
- Central bank heads will be in the spotlight this week, with Draghi on Monday, Powell on Tuesday & Thursday, and Carney on Friday.
- Inflation data for the Eurozone on Wednesday and the US on Thursday represent the greatest event risk for the week.
- Retail trader positioning remains mixed as measures of volatility remain elevated after the early-February surge.
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02/27 Tuesday | 13:30 GMT | USD Durable Goods Orders (JAN P)
Durable Goods Orders are an important barometer for US consumption, which constitutes roughly 70% of GDP. Typically, consumers hold off on buying durable goods during poor economy conditions; thus, improved orders suggest confidence among American consumers with respect to their future financial security. The preliminary January print is expected to show a drop of -2.0% over the prior month after the +2.8% increase in December. The data won’t likely help US growth expectations for Q1’18, which have edged lower over the past month (per the Atlanta Fed GDPNow forecast) to +3.2% annualized.
02/28 Wednesday | 10:00 GMT | EUR Eurozone Consumer Price Index (FEB)
The European Central Bank sees EUR/USD finishing 2018 at 1.1700, and at its current exchange rate, it’s more than 5% above the central bank’s forecast. Year-over-year, the Euro trade-weighted exchange rate is up by +9.7%, a veritable headwind for inflation.Given that the ECB has made clear it wants to see inflation back near its +2% target on a sustainable basis before it sincerely exits all of its extraordinary, any signs that inflation is struggling could undercut speculation around the ECB removing its stimulus; a reaction that could sink the Euro.
Accordingly, as market participants are being forced to reconsider their bullish Euro bets, there is no data release in the current week – and perhaps, thus far year-to-date – more important than the preliminary February CPI report. Due in at +1.2% on the headline, this would be a small decline from the prior +1.3% reading in January (y/y). The core reading is due in unchanged at +1.0% (y/y). Neither points to an outcome where traders should be eager to rekindle speculation over a hawkish ECB policy turn.
02/28 Wednesday | 13:30 GMT | USD Gross Domestic Product (4Q S)
The second reading of annualized US GDP in Q4’17 is expected to come in at a revised growth rate of 2.5% from the +2.6% reported, still a stark decline relative to the +3.2% growth rate in Q3’17, according to a Bloomberg News survey. Overall, there still seems to be a sharp divide between ‘soft’ and ‘hard’ economic data, with confidence readings surging without a commensurate gain in actual economic activity. The Atlanta Fed GDPNow forecast sees last quarter’s growth at +3.2%, a bit more rich than most surveys. Regardless of the print, March rate hike odds are likely to hold at 100%; any impact on the US Dollar will be on the projected path of rate hikes thereafter (June hike odds are at 76%).
03/01 Thursday | 13:30 GMT | USD PCE Core (JAN)
According to a Bloomberg News survey, US consumer prices were higher on a monthly-basis in January, although price pressures remain weak. The Fed’s preferred gauge of inflation, the PCE Core, is due in at +0.3% from +0.2% (m/m) and +1.5% unch (y/y). The expectation for a reaction depends largely on the perception that the Fed will either accelerate or decelerate their current path of projected rate hikes. As noted in the January FOMC meeting minutes, "Members agreed that the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate.” It would appear that traders hoping for a catalyst for a stronger US Dollar are better off looking elsewhere.
03/02 Friday | 13:30 GMT | CAD Gross Domestic Product (4Q)
The first look at Canadian Q4’17 GDP growth is expected to show steady improvement over the prior quarter, even if the growth rate may have slowed down between November and December. GDP is due in at +3.4% for December from +3.5% in November (y/y), but the annualized quarterly GDP reading is due in at +2.1% from +1.7%.Once again, these readings highlight how the base effect in statistics can skew data readings.
Ultimately, these are the types of data that would suggest that the Bank of Canada won’t be thinking about raising rates in the next few months; May rate hike odds have dropped from 83% to 67% in recent weeks, dragging down the Loonie in the process. The 20-day correlation between CAD/USD and May rate hike odds is currently +0.83, therefore any reaction in the Canadian Dollar will come via the rate pricing channel.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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