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Dollar, Pound Face Uneven Volatility Risk on PMI and PCE Data

Dollar, Pound Face Uneven Volatility Risk on PMI and PCE Data

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • Pound to see greater volatility if PMI print tops forecasts vs. the alternative
  • US Dollar to rise as risk appetite sours if PCE data boosts Fed rates outlook
  • Australian, Canadian Dollar decline as prices correct after last week’s rally

The UK Manufacturing PMI report headlines the economic calendar in European trading hours. Consensus forecasts point to a slowdown that brings the pace of factory-sector activity growth to the lowest in four months. A soft print would fall in line with recent deterioration in BOE rate hike expectations.

In fact, futures markets suggest traders no longer expect the UK central bank to hike rates at all in 2016. The British Pound has been falling alongside measures of the 12-month policy view since mid-June 2015, hinting that much of the negative influence from this theme has already been reflected in the exchange rate.

With that in mind, a downtick on the PMI figure may have relatively muted implications for the price action. An upside surprise that clashes with the status quo and reignites BOE tightening bets could spark volatility however, sending Sterling higher. It may also undermine risk appetite, weighing on the sentiment-linked Australian and New Zealand Dollars.

A similar narrative emerges as traders look onward to the release of US PCE data. The Fed’s favored inflation gauge is due to show that the core price growth rate edged up to 1.4 percent in December, the highest since November 2014. As with the BOE, the recent dovish shift in Fed policy bets makes for asymmetric volatility risk should the number come out stronger than expected.

A strong result would clash with a 2016 view that has become dubious of the central bank’s ability to issue even one rate 25 bps hike, much less fulfill policymakers’ forecast for 100 bps in cumulative tightening. Even a modestly firm print may send the US Dollar broadly higher and trigger risk aversion, whereas a soft one could pass with relatively little fanfare.

Most major currencies consolidated in narrow ranges overnight. The Aussie and Canadian Dollars underperformed, correcting downward having been the best-supported currencies in the G10 FX space last week. AUD managed a brief bounce following a better-than-expected outcome on the Caixin China Manufacturing PMI report, but follow-through proved lacking.

This seems to make sense: the factory sector contracted once again, just at a slightly slower pace than analysts projected (48.4 vs. 48.1 forecast). The result was well within near-term trend averages however, offering little impetus for investors to rebalance exposure ahead of a busy docket of higher-profile event risk due later in the week.

Are FXCM traders buying or selling the US Dollar? Find out with DailyFX SSI!

Asia Session

GMT

CCY

EVENT

ACT

EXP

PREV

21:45

NZD

Net Migration SA (DEC)

5510

-

6190

22:30

AUD

AiG Perf of Mfg Index (JAN)

51.5

-

51.9

23:00

AUD

CoreLogic RP Data House Px (MoM) (JAN)

0.9%

-

0.0%

23:30

AUD

TD Securities Inflation (MoM) (JAN)

0.4%

-

0.2%

23:30

AUD

TD Securities Inflation (YoY) (JAN)

2.3%

-

2.0%

01:00

CNY

Manufacturing PMI (JAN)

49.4

49.6

49.7

01:00

CNY

Non-manufacturing PMI (JAN)

53.5

-

54.4

01:45

CNY

Caixin China PMI Mfg (JAN)

48.4

48.1

48.2

02:00

JPY

Nikkei Japan PMI Mfg (JAN) F

52.3

-

52.4

05:00

JPY

Vehicle Sales (YoY) (JAN)

0.2%

-

3.1%

05:30

AUD

Commodity Index AUD (JAN)

-

71.2

05:30

AUD

Commodity Index (YoY) (JAN)

-

-23.3%

European Session

GMT

CCY

EVENT

EXP

PREV

IMPACT

08:00

CHF

Total Sight Deposits (JAN 29)

-

472.4B

Low

08:00

CHF

Domestic Sight Deposits (JAN 29)

-

403.1B

Low

08:30

CHF

PMI Mfg (JAN)

51.1

52.1

Medium

08:45

EUR

Markit/ADACI Italy Mfg PMI (JAN)

54.8

55.6

Medium

08:50

EUR

Markit France Mfg PMI (JAN F)

50.0

50.0

Medium

08:55

EUR

Markit/BME Germany Mfg PMI (JAN F)

52.1

52.1

Medium

09:00

EUR

Markit Eurozone Mfg PMI (JAN F)

52.3

52.3

Medium

09:30

GBP

Net Consumer Credit (DEC)

1.3B

1.5B

Low

09:30

GBP

Net Lending Sec. on Dwellings (DEC)

3.7B

3.9B

Low

09:30

GBP

Mortgage Approvals (DEC)

69.6K

70.4K

Medium

09:30

GBP

M4 Money Supply (MoM) (DEC)

-

0.4%

Low

09:30

GBP

M4 Money Supply (YoY) (DEC)

-

0.5%

Low

09:30

GBP

M4 Ex IOFCs 3M Annualised (DEC)

-

5.9%

Low

09:30

GBP

Markit UK PMI Mfg SA (JAN)

51.6

51.9

Medium

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EUR/USD

1.0585

1.0724

1.0778

1.0863

1.0917

1.1002

1.1141

GBP/USD

1.3743

1.4006

1.4125

1.4269

1.4388

1.4532

1.4795

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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