– The BOE will likely be hamstrung at its meeting this week, while the FOMC will practice patience; after all, Fed Chair Jerome Powell has said that they do “not feel any hurry” to raise rates again.
– Inflation data from Canada and the UK will continue to show that the decline in oil prices in Q4’18 is still being felt in price pressures.
– Jobs data from Australia will show a stable labor market, hoping to continue the stretch of better than expected data over the past few weeks.
Join me on Mondays at 7:30 EDT/11:30 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.
03/20 Wednesday | 09:30 GMT | GBP Consumer Price Index (FEB)
The upcoming February UK CPI report is due to show headline inflation stable at +1.8% (y/y), while the monthly reading will rebound sharply from -0.8% to +0.4%. Core CPI is expected to have stayed on hold at +1.9% (y/y). With energy markets having stabilized in the first few weeks of 2019 following their dramatic collapse in Q4’18, we’re now starting to see price pressures rebound. Even as the lack of progress over Brexit remains a considerable hurdle for the BOE, the current mix of growth and inflation data would warrant a patient policy stance nonetheless. Rates markets are pricing in a 40% chance of a rate move in 2019.
03/20 Wednesday | 18:00 GMT | USD FOMC Rate Decision and Press Conference
Fed Chair Jerome Powell has seemingly ‘righted the ship’ in recent weeks after a rough stretch of communication from the end of October through January. Maintaining the view taken at the January FOMC meeting, Fed Chair Powell has said that the FOMC does “not feel any hurry” to raise rates again soon. Evidently, there has been some concern over the state of the US economy – the Atlanta Fed GDPNow growth tracker shows Q1’19 GDP at a mere +0.4% annualized – as well as how quickly price pressures would stabilize following the downturn in energy prices during Q4’18.
But the fact of the matter is that wage growth is at its highest level seen in decades and the labor market is producing the lowest unemployment rate in nearly 50-years, two clear indicators that, at least in the near-term, more hawkish policy machinations are possible. As it were, rates markets don’t see this to be the case, given that there’s a 32% chance of a 25-bps rate cut being priced-in by the end of the year. Such divergence between what the Fed wants to do and what the market thinks the Fed will do typically yields higher than normal volatility.
03/21 Thursday | 00:30 GMT | AUD Employment Change and Unemployment Rate (FEB)
The Australian jobs market has continued its strong trend in recent months, with jobs growth coming in above expectations from November through January. The six-month average of jobs growth improved from +15.1K in July 2018 to +29.5K last month. During this timeframe, the unemployment rate dropped from 5.3% to 5.0%. For the upcoming report, the Australian economy is projected to have added +15K jobs while the unemployment rate is due on hold at 5.0%. These data should continue the recent trend of better than expected Australian economic data; the Citi Economic Surprise Index for Australia is up from -23.3 on February 12 to 16.5 on March 15.
03/21 Thursday | 12:00 GMT | GBP Bank of England Rate Decision
The Bank of England meets this week in what may be a policy meeting tinged with heightened concerns about Brexit. After all, after a series of votes this week, the UK parliament and UK Prime Minister Theresa May are no closer to finding a way to Brexit on mutually acceptable terms with the European Union. As such, despite a vote to avoid a no deal, “hard Brexit,” the measure was non-binding, meaning that a crash out on March 29 is still possible. As such, the coming BOE policy meeting should feature a fair amount of fear mongering about the potential impact of Brexit; we’re not looking for the Monetary Policy Committee and Governor Mark Carney to take on any sort of optimistic tone (even if the worst of their prognostications haven’t borne fruit).
Pairs to Watch: EURGBP, GBPJPY, GBPUSD
03/22 Friday | 12:30 GMT | CAD Consumer Price Index (FEB)
The stabilization in energy prices since the start of the year is making its way through the Canadian economy, as the upcoming February inflation report will show. Headline CPI is due in stable at 1.4% (y/y), but the monthly reading is due in at a pace of 0.6% from 0.1% (m/m). For now, simple stability in energy markets will help the Canadian Dollar and inflation rebound hand-in-hand. After all, the energy sector accounts for roughly 11% of the Canadian economy. Regardless, traders should keep expectations low for a policy change from the Bank of Canada any time soon. Coming into this week, overnight index swaps were only pricing in a 4% of a 25-bps rate cut in the first half of 2019 and a 26% chance of a cut by September 2019.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at [email protected]