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FX Week Ahead: November US CPI & Retail Sales, ECB Rate Decision

FX Week Ahead: November US CPI & Retail Sales, ECB Rate Decision

2018-12-10 17:30:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Talking Points:

- With the Brexit vote in the UK parliament canceled for Tuesday, two-volatility in the British Pound will remain elevated for the near-future.

- The Euro may still have room to rally around the ECB meeting, even if President Draghi reaffirms the central bank’s easing stance with another TLTRO (or like) program.

- Retail traders are increasingly reticent to hold the US Dollar long, even as risk appetite sours.

Join me on Mondays at 7:30 EST/12:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.

12/11Tuesday | --:-- GMT | GBP UK Parliament’s Brexit Vote Canceled

UK Prime Minister Theresa May has called off the Brexit vote set for Tuesday, December 11 in the UK parliament. The reasoning is simple: she did not have the votes to pass her mutually agreed upon EU-UK Brexit deal. The next steps forward are tricky with pitfalls abound. A no confidence vote seems likely, if which if May fails then a general election could ensue. Otherwise, if May survives, now that ECJ has ruled it’s legally feasible, it’s possible that UK government revokes Article 50 and proceeds with a second referendum. A no-deal Brexit - or no Brexit at all, after a second referendum - is very possible. Two-way volatility in the British Pound should remain elevated for the near-future.

Pairs to Watch: EUR/GBP, GBP/JPY, GBP/USD

12/12 Wednesday | 13:30 GMT | USD Consumer Price Index (NOV)

Upcoming inflation data for November will show that both measures of the US Consumer Price Index remain above the Federal Reserve’s medium-term target of +2%, even if the topline figure is trending in the wrong direction. Headline CPI is due in at +2.2% from +2.5%, and Core CPI is due in to hold at +2.2% (y/y). Due ahead of the December FOMC rate decision, these readings may have two key impacts: first, that expectations of a December rate hike are crystallized (currently at 68%); and second, that odds of further tightening in 2019 are diminished. We’ve previously argued that the Fed is becoming more data dependent again, and the inflation report on Wednesday will only enhance expectations that an adjustment away from the preset policy course is coming next week.

Pairs to Watch: EUR/USD, USD/JPY, Gold, DXY Index

12/13 Thursday | 12:45 GMT | EUR European Central Bank Rate Decision

Ultimately, the competing factors of the ongoing Italian budget deficit negotiations, the end of the QE program, the decline in inflation expectations (thanks to the dramatic collapse in oil prices since early-October), and desire by the ECB to normalize its policy mean that we’re likely to see a bit of volatility come Thursday, but not necessarily any clear direction. If the Euro is going to come out of the ECB meeting on Thursday trading to the topside, then it will be tethered to September 2019 rate hike odds increasing further.

With respect to the ECB’s desire to normalize policy, ECB President Draghi has previously stated that he’d like to see rates rise sometime during “summer 2019.” Currently, overnight index swaps are pricing in a 40% chance of a hike by September 2019. While this is a sharp drop from their high watermark of 73.2% on October 16, rate hike odds have nearly doubled since their low point of 21% on November 29 (no doubt, mirroring the improved perception around Italy).

With QE set to end this month (as has been planned since the June 2018 policy meeting), it’s possible that the ECB makes permanent its TLTROs to ensure that there is no calcifying of credit conditions in southern Europe; while German and French banks have excess reserves, banks in Italy and Spain, for example, still borrow from the ECB.

Pairs to Watch: EUR/GBP, EUR/JPY, EUR/USD

12/14 Friday | 08:30 GMT | EUR Markit Eurozone Composite PMI (DEC P)

Eurozone economic data has been uneven over the past few months, with gauges of economic data momentum slumping during Q4’18. The Citi Economic Surprise Index for the Eurozone entered the week at -49.2, an improvement from the low seen on November 23 at -65.1 but still far from the Q4’18 high seen on October 1 at -28.7. In line with the slight stability seen in the momentum gauge, the Markit Eurozone Composite PMI reading is due in at 52.8 from 52.7. On the heels of the ECB rate decision just one day earlier, the impact of the data will be more limited than a release of this stature would usually entail; the policy implications are extremely low.

Pairs to Watch: AUD/JPY, AUD/NZD, AUD/USD

12/14 Friday | 13:30 GMT | USD Advance Retail Sales (NOV)

Consumption is the most important part of the US economy, generating nearly 70% of the headline GDP figure. The best monthly insight we have into consumption trends in the US might arguably be the Advance Retail Sales report. In October, according to a Bloomberg News survey, consumption slumped with the headline Advance Retail Sales due in at +0.1% from +0.8% (m/m). Conversely, the Retail Sales Control Group, the input used to calculate GDP, is due in at +0.5% from +0.3% (m/m). Growth expectations may only be mildly supported coming out of the data, as Q4’18 US GDP is set to slow further from its peak in Q2’18 US GDP.

FX Week Ahead: November US CPI & Retail Sales, ECB Rate Decision

Based on the data received thus far about Q4’18, the Atlanta Fed GDPNow forecast is looking for growth at +2.4%. The next update to the Q4’18 forecast will be released after Friday’s US economic data.

Pairs to Watch: DXY Index, EUR/USD, USD/JPY, Gold

Read more: Why Does the US Yield Curve Inversion Matter?

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX

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