Fed’s and ECB’s rate decisions in focus

The markets were rocked by the back and forward of the US-Sino relationships last week and we expect the issue to continue to sway the markets next week. Also, on the political front the UK elections are to take place next week and the result is expected to provide some relief for the pound, from the political uncertainty surrounding it. On the monetary policy side, central bank interest rate decisions provided for some volatility in the past week for commodity currencies. In the coming week, two big players of the field, the Fed and the ECB are expected to release their own interest rate decisions, however also Turkey’s CBRT and Switzerland’s SNB are also due. We intend to focus more on the latter two decisions in our daily commentary though. Be advised that a number of speeches by various policymakers could influence the market as well. As for financial releases there are a number of data coming out from Japan, however we also tend to single out the US inflation rates as well as UK’s GDP rate for October.

USD – Fed’s interest rate decision front and center

The US-Sino relationships provided substantial volatility for the markets last week as the uncertainty surrounding them and the possibility of a “phase 1 deal” increased and decreased depending on the headlines. We expect the issue to continue to trouble the markets next week and could intensify further. Main arguments for such an intensification could include the deadline for additional US tariffs on Chinese imports on the 15th of December. As for the inner political stage the impeachment probe against President Trump by the US Congress is progressing, yet we maintain the view that probably the Republican controlled Senate may ultimately get him off the hook. Main interest of USD traders next week could prove to be the release of FOMC’s interest rate decision on Wednesday. The bank is widely expected to remain on hold at +1.75%, after three consecutive rate cuts of 25 basis points each. Currently Feds Funds Futures (FFF) imply a probability of the bank remaining on hold at 97.2%, more or less strengthening the arguments for such a prognosis. We could see the bank maintaining a neutral tone in the accompanying statement, maybe even show some optimism as their counterparts did last week. Never the less the recent weak ISM PMI’s for November and especially the manufacturing PMI could be causing some concerns and may reduce the banks’ confidence somewhat. On the other hand, today’s surprise NFP release along with other releases on Thursday may help to ease such worries. Also, the protracted trade war with China and recent tweets of President Trump for tariffs on other countries such as France, Brazil and Argentina, could force the Fed’s hand to underscore once again the risks arising from trade uncertainty for the US economy. The decision is also to be accompanied by a new dot plot and renewed economic projections. In the dot plot we could see the bank maintaining rates unchanged for 2020 and currently ignoring political calls from the White House for lower rates, as the 2020 elections are nearing. As for economic projections the recent release of the US GDP rate for Q3, outperforming expectations could influence the projections as well. The importance of the projections especially for inflation and growth is expected to be elevated and we could see the bank being more data driven. As for financial releases, albeit there a number of them due out from the US next week we tend to focus on three. The first would be the release of the headline and core CPI rates for November on Wednesday, although they could be overshadowed by the FOMC’s interest rate decision. The second would be the retail sales growth rates for November on Friday but before that we will be keeping an eye out also for the release of the PPI rates for November on Thursday.

GBP – Elections to clear a mess

Cable was finally able to break upwards, the sideways motion it maintained over November. The pound also strengthened against a number of other currencies, as hopes about the upcoming elections resolving the political chaos of the UK stregnthened. Polls about the UK elections seem to solidify a substantial lead of the Conservatives against the main opposition party Labour. The preelection debate is heating up as the actual elections are to take place next Thursday in the coming week. Should the actual result verify existing polls providing a comfortable majority to the Conservatives, it would enable Boris Johnson to actually deliver Brexit. Such a scenario could also provide a necessary cushion for the politician, ahead of the upcoming negotiations with the EU. The pound is expected to strengthen in such a scenario, as UK politics would seem to fall into order providing the way out of the EU. On the flip side should the Conservatives not be able to secure the necessary majority, we could see the pound weakening, as a possibly hung parliament could feed further uncertainty. In such a scenario the two main parties may need to find allies in order to have a majority or otherwise face repeat elections, damaging growth and confidence. However the prolonged Brexit period has taken its toll on UK’s economy and the effects could not be better described than the weakening PMIs released in the past weeks. As for financial releases, next week, we tend to focus on the release of UK’s GDP growth rates for October on Tuesday. Should the rates disappoint the markets we could see the pound weakening, especially should the UK economy shrink. On the same day we also get UK’s manufacturing output growth rate and UK’s trade balance both for October.

EUR – ECB’s interest rate decision front and center

The common currency strengthened against the USD on Monday landing at higher grounds Friday morning. Yet the move may have been more USD driven than EUR related. On the contrary against the pound the EUR has weakened, reaching 2.5 years low. Never the less, EUR traders are zooming in ECB’s interest rate decision next week, for further clues about the bank’s intentions. The bank is widely expected to remain on hold at 0.0% for the refinancing rate. Currently EUR OIS imply a probability of 90.50% for such a scenario supporting such expectations. Interestingly enough the same instrument seems to imply currently, that no cuts are to be expected until the end of 2020. It should be noted that the ECB had experienced increased pressure about negative rates hurting the economy from both politicians and business leaders. On the other hand it should be noted that Eurozone’s economic data albeit improving somewhat lately, are still a long way from being healthy, especially on the GDP growth level and inflation, as both are quite low at the current stage adding further to the pessimistic sentiment. For those reasons, we expect the bank to remain accomodative in its monetary policy. Also we expect the bank to maintain its rates at low levels (“current levels” or “lower levels”) until inflation returns or aligns with the bank’s target of +2% yoy. We do not expect any alteration regarding the bank’s QE program, on the contrary we could see the bank maintaining a wait and see position, for any results of the programm which started in September. As for the updated projections, we expect the bank to maintain its outlook for a gradual and possibly modest recovery in growth as well as inflation. However, we would also like to dig in a bit deeper into the balance of power in the ECB, as Thursday’s meeting is to be the first under the presidency of Christine Lagarde. It should be noted that BuBa president Weidman seems to be slowly moderating his tone and criticism about the bank’s accomodative policy. Such a scenario, could help the new President to smoothen out any differences within the bank. Also we could see the new President renewing the call to member states for fiscal stimulus for the Eurozone. As for financial releases affecting the single currrency, next week we tend to concentrate on the release of Germany’s ZEW economic sentiment indicator for December. On second base we would also like to menion the release of Germany’s trading data for October, the final releases of the Germany’s HICP rates for November and Eurozone’s industrial production growth rate for October. On the political front, the summit of the European Council in Brussels on Thursday and Friday, seems to gather some interest. The meeting gains on interest as the preliminary result of the UK elections probably will be out by then. Hence, we could see some announcements about Brexit being made there.

JPY – Safe haven flows and financial data eyed

The Japanese currency was once again heavily influenced by safe haven flows, mostly due to the ping pong of the frictions in the US-Sino relationships. We could see the JPY maintaining this characteristic, next week as the issue could become even hotter. Characteristically today JPY had a cold shower, weakening against the USD, as China announced that it would waive some tariffs on US agricultural products. Should the US-Sino relationships continue to influence the Japanese currency’s direction as a safe haven, we could expect that any easing in the tensions could result in the weakening of the JPY and vice versa any further escalation could result in a strengthening of the Yen. Be advised that as for monetary policy is concerned, last week BoJ governor Kuroda stated that he saw no need to ease further now. On the other hand, BoJ’s governor also stated later in the week that it is important to strike the right balance between growth and fiscal discipline. As for financial releases, we get a number of them next week from Japan. Starting early Monday morning, we get Japan’s revised GPD growth rate for Q3, while on Wednesday we get Japan’s Corporate Goods Prices for October. On Thursday’s Asian session, we get Japan’s machinery orders growth rate for October and on Friday we get the Tankan big manufacturers and non-manufacturers indexes for Q4.

AUD – Chinese data to move the Aussie

The Aussie leaves a quite positive week behind it, especially against the USD. RBA’s interest rate decision provided some support for the Aussie, lifting it against the USD and the currency seems to have maintained its gains. On the monetary policy front Aussie traders are focusing on the speech of RBA’s governor Lowe on Tuesday at the AusPayNet Summit, for any more indications about the bank’s intentions. As for financial releases Aussie traders are to have an early start next week as China’s trade data for November are out. Despite most headlines focusing usually on the trade balance as such, we tend to underscore the importance the import readings for Australian exporters. Also on Tuesday we get China’s CPI rates for November which could also provide some volatility for the AUD. However on Tuesday we could also be getting some volatility for the Aussie, from the release of Australia’s Business confidence indicator for November and Australia’s home price index for Q3.

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