FX Week Ahead: Australian & Eurozone CPI, BOE Rate Decision, US & Canadian Jobs
- As is fairly typical for a week spanning the end of one month and the beginning of another, the economic calendar brings forth multiple ‘high’ rated events from across the globe Tuesday through Friday.
- The headline event of the week is the October US Nonfarm Payrolls report on Friday, eclipsing what would normally be a very important Bank of England November policy meeting.
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Price pressures in Australia are expected to have moderatedaround the middle of the Reserve Bank of Australia’s +2-3% target range in Q3’17. Due in at +1.9% from +2.2% (y/y), the Q3’18 quarterly inflation report is expected to be another signpost for the RBA that necessitates neutrality in its policy stance. Even though labor markets have continued to improve in recent months, a lack of wage growth and rising indebtedness of households (already at all-time highs) makes for a concerning future for consumption trends.
Currently, rates markets are pricing in only a 2.6% chance of a 25-bps rate cut by December 2018. It will take several successive inflation reports above +2% in order to get the needle moving on RBA rate expectations again; the first month that sees greater than a 20% implied probability of a rate move is May 2019.
10/31 Wednesday | 10:00 GMT | EUR Eurozone Consumer Price Index (OCT A)
The initial October Eurozone Core CPI is due in at +2.2% (y/y), barely higher than the +2.1% pace seen in August. The core reading for Octoberis set to nudge up as well, due in at +1.1% from +0.9% (y/y). Now that the Euro, on a trade-weighted basis, is underwater over the past year (-0.83% between October 26, 2017 and October 26, 2018), it stands to reason that inflation has a natural cushion underneath it for the foreseeable future. Per the October ECB rate decision, uncertainty has receded around the Governing Council’s inflation forecast, further solidifying the near-term path of policy (QE ending in December 2018); the October inflation report won’t change matters.
11/01 Thursday | 12:00 GMT | GBP Bank of England Rate Decision
Whenever a new Quarterly Inflation Report is to be furnished the Monetary Policy Committee, the Bank of England rate decision is usually considered a top event – if not the top event – for that week, perhaps month. But the forthcoming November policy meetings, one of the four during the year that sees a new QIR released, will not fulfill its historical role as a top mover. Why? One word: Brexit. Under Governor Mark Carney, as was made clear at the August policy meeting, the BOE will not be changing rates until the Brexit negotiation window ends in March 2019. Accordingly, rates markets are pricing in May 2019 for the next rate hike – the first meeting with a QIR outside of the Brexit negotiation window.
11/02 Friday | 12:30 GMT | CAD Net Change in Employment & Unemployment Rate (OCT)
The Canadian labor market has had a very uneven 2018. The first eight months of the year produced negative jobs growth on average, but then the yearly average turned positive after a blowout September jobs report. But the September Canadian labor report at the topline was superficially good, given the internals: of the +63.3K jobs added, +80.2K were part-time – which means that -16.9K full-time jobs were lost (this also explains the unexpected drop in wage pressures: part-time jobs have lower wages than full-time jobs). Even though the forthcoming October report is set to see topline growth of +12.5K, if we get another hollow report – full-time jobs lost in favor of part-time jobs added – then the Canadian Dollar is exposed to downside.
11/02 Friday | 12:30 GMT | USD Change in Nonfarm Payrolls & Unemployment Rate (OCT)
By this point in the economic cycle, the luster of the US Nonfarm Payrolls report has worn down. Indeed, essentially viewed as a ‘given’ in any month as a source of stability for the economy, few traders will be looking to the forthcoming October US jobs report as a guidepost for any clues onto Federal Reserve policy. With the unemployment rate set to hold at 3.7% as the economy added +193K jobs in October, it’s very possible that this jobs data is forgotten by the time markets open up the following Monday. Accordingly, the risk the US labor market brings to the table is asymmetric for the US Dollar: a strong report merely confirms what is known and doesn’t impact Fed policy; a weak report could sow confusion and discord over the near-term path of interest rates.
According to the Atlanta Fed Jobs Growth Calculator, the economy only needs +109K jobs growth per month over the next 12-months in order to sustain said unemployment rate at its current 3.7% level.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at firstname.lastname@example.org
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