Fed The Dominating Force On Data Heavy Week

Market Analysis /
17 Dec 2018

USD

This is the first week that we will really start to see the slowdown before the Christmas holidays. However, this week also sees key events that will likely shape the US dollar as head into the final weeks of the year. The most notable story of the week will focus on the global economic outlook as the Fed prepares for their final rate-setting meeting of the year. The last few weeks have seen some Fed members question whether the gradual rate increases that we have seen are damaging the economy. The fear of a global slowdown, the deadlock between China and the US in trade talks, and the aggressive sell off in stock markets have many questioning whether the Fed will raise rates on Wednesday.

Failure to move rates on Wednesday would leave the dollar severely under pressure but the expectations are that the Fed will still act, with a 74% probability of a 0.25% hike in rates. This all comes despite the turmoil currently crippling the markets.

President Trump has his own issues that could give the Dollar some life this week, mainly the threat of yet another government shutdown. This time its budget deadlock around border security that threatens to shut down the government, this would be the second shut down under Donald Trump’s administration. Trump also has the added issue of Michal Cohen’s conviction for campaign finance fraud. It seems for now that Cohen has taken the flak for the President, but some see it inevitable that this will come back round on the President, with the threat of impeachment a very real one.

EUR

Last week’s Eurpoean Central Bank rate decision was the confirmation the market had been waiting for on the completion of the asset purchase program. Mario Draghi confirmed that the asset purchase program that had been in place was set to finish at the end of December, as expected. However, Draghi also commented on the fact that the economy may still need stimulus measures if the expected slowdown in the global economy continues.

There are a number of headwinds for the Eurozone, with Germany’s contracting economy, Italy causing more political headaches, and Donald Trump targeting the European auto industry with more tariffs. The continuation of these scenarios will leave the Euro looking nervous into 2019. Apart from Monday’s CPI inflation readings the Europe calendar is looking quiet this week, especially as the market starts to wind down for the holiday break.

GBP

There will be no festive feeling this week for UK Prime Minister Theresa May as she looks to continue to fight on all fronts for not only her political career, but it seems she is also fighting for the unity of the United Kingdom as Brexit threatens to tear the country apart. As another new week begins in the Brexit saga we are no closer to knowing what the end game is. Will have a deal come March 29th?  Or will  Brexit happen at all?

The calls for a second referendum are growing louder by the day, with many split into two camps. One being the undemocratic view of ignoring the first vote, and the second being that the people have a right to decide on whether this kind of Brexit was truly what they wanted. Whatever the outcome it seems that the division is likely to continue, and with the PM not likely to reschedule the “Meaningful Vote” in parliament until after Christmas we may not have an answer for a while. It is all the uncertainty that will cause issues for the Sterling.

CAD

It is an incredibly busy week on the domestic calendar in Canada as the Loonie awaits Bank of Canada inflation readings, job numbers, GDP and Retail Sales numbers. Despite the slew of data it will likely rbe the threat of global economic slowdown, slumping investor confidence in risk assets and the fragile oil price that dominate the market, not to mention the Fed rate decision.

The greenback has outperformed the Loonie for 8 of the last 11 weeks, but this week’s data, that is expected to show signs of a return to positive figures could break that trend and see the Canadian dollar finish the week on the upside.

AUD

With so many global stories moving the markets, it is likely that the Australian domestic headlines this week could be pushed to the back. As the week moves on the data grows bigger with the full jobs report due on Thursday. However, before that we will see the New Year economic projections in line with the Reserve Bank of Australia meeting minutes. The RBA could warn on the housing market that has seen a shift in sentiment recently, but with the rate outlook still unchanged it is unlikely there will be much movement in the Aussie dollar. While the Meeting Minutes will be watched with the usual amount of scrutiny for any policy clues - markets will likely have to wait until the New Year for any direction on how the soft GDP figures that have impacted the RBA's growth outlook.

NZD

It is a week full of event risk for the Kiwi as the domestic calendar is jam-packed with headline readings. Despite this, the main risk event for the currency will be the FOMC decision from the US. We know the reliance on the US from New Zealand is a key theme for the year as the global economic headwinds remain. However, there is potential that trade balance data, and GDP readings released on Wednesday evening will lead to some short term upside if the expected quarterly reading of 0.6% GDP growth is realized.

 

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