Forex Market Awaits FOMC Outcome
Even after upbeat prints of US Retail Sales & PPI numbers, the US Dollar Index (I.USDX) headed for the second weekly decline ahead of the crucial FOMC meeting as market players remained worried that weakness in global economy, led by renewed sell-off in crude oil, could force the Fed to adopt slow pace of monetary tightening in 2016 after the first in almost a decade interest rate lift-off takes place during the current week. The Euro region currency, even with no major economic support, extended its short-covering rally triggered by previous week's ECB disappointment while the GBP remained sluggish with a greater decline in Manufacturing Production and neutral BoE tone. Moving on, the JPY rallied heavily against majority of its counterparts after market participants run for safe-havens ahead of the FOMC and the commodity currencies, namely NZD, AUD and CAD, extended their downside as Crude prices kept declining with EIA forecast favoring extended supply glut and China remained under pressure even after registering five month high Industrial Production.
As the world is near to witness much awaited interest rate hike by the US Federal Reserve, at the end of two-day monetary policy meeting on Wednesday, all eyes are stuck on the FOMC outcome which will govern this week's forex moves. Moreover, Inflation numbers by the US, UK, Europe and Canada, coupled with UK Retail Sales, job details and monetary policy meeting by the Bank of Japan (BoJ) are some other releases that could continue fueling the Forex volatility.
FOMC Would Determine The USD Fate
Having witnesses sustained improvement in labor market and slew of upbeat economic releases, Federal Reserve policy makers seem all set to trigger the first interest rate hike since 2006 during its Wednesday's FOMC outcome which becomes the biggest event of the week and could determine the fate of US Dollar. Wednesday's Fed outcome is also accompanied by the quarterly economic projections by the US central bank and would be followed by press conference of the Federal Reserve Chair, Janet Yellen, which increases the importance of the event.
Source: US Federal Reserve
Although, the US central bank is expected to trigger a 0.25% hike in its benchmark Fed funds rate, the news seems almost priced-in during last three months and market players are more likely to concentrate on how quickly the FOMC could normalize monetary policy going forward from the current state of near zero interest rate. During its September release of quarterly economic forecasts, the Fed lowered down the longer-term growth and Inflation forecasts and the interest rate projections also signaled a slower tightening in future. Moreover, the FOMC members, including the Fed Chair, have been saying that the upcoming interest rate hikes, following the December ones, would be data dependant and will gradual. Hence, it wouldn't be sufficient enough to only witness the interest rate hike but all the details of this particular event in order to determine the medium-term moves of the US Dollar.
With the interest rate hike almost priced-in, guidance on the Fed's future moves could determine the strength of the US Dollar going forward and a slower normalizing to the monetary policy may drag the greenback down. Moreover, tone of the Fed Chair and the central bank's economic projections would provide further information to forecast medium-term USD moves.
In addition to the Wednesday's FOMC, monthly releases of US CPI, Empire State Manufacturing Index, Building Permits, Housing Starts and Philly Fed Manufacturing Index are some other economics that could help foresee immediate trend of the greenback.
While Tuesday's CPI is more likely to disappoint USD bulls with 0.0% mark versus 0.2% prior, the Core-CPI reading is likely to remain unchanged at 0.2% and the Empire State Manufacturing Index, scheduled for Tuesday release, may signal slower contraction in manufacturing with -5.7 mark against -10.7 previous reading. Moving on, housing market numbers, namely, Building Permits & Housing Starts, are scheduled for publish on Wednesday and are less likely to trigger much of the US Dollar move ahead of the FOMC as the Building Permits are expected to remain unchanged at upwardly revised 1.16M and the Housing Starts could mark 1.14M against 1.06M prior. Further, Thursday's Philly Fed Manufacturing Index is likely to replicate the Empire State reading by indicating improvement in US manufacturing with 2.1 number as compared to prior 1.9 mark.
ZEW Economic Sentiment, PMIs and CPI To Help Forecast EUR Moves
Considering recent recovery of the regional currency, EUR, without major economic support, numbers relating to the EU & German ZEW Economic Sentiment, Flash Manufacturing & Services PMIs and Final reading of November CPI, could provide meaningful information to forecast near-term Euro trend.
EU & German ZEW Economic Sentiment, scheduled for Tuesday, favors that both the indices relating to EU and Germany are likely to print four month highs with 34.4 & 15.2 mark against 28.3 and 10.4 respectively, favoring a bit more of the Euro rise. However, numbers relating to Flash Manufacturing & Services PMI, scheduled for Wednesday release, indicate slower expansion of these sectors, at 52.7 and 55.5 v/s 52.9 & 55.6 for German Manufacturing & Services respectively and the 52.8 & 54.00 against 52.8 & 54.2 for the same EU sectors and favor the EUR correction. Moreover, Final CPI, scheduled for Wednesday, is more likely to confirm its initial 0.1% forecast and is less likely to trigger any big EUR moves while Thursday's German Ifo Business Climate is likely to print the highest levels since June 2014 and may help EUR extend its present advance.
With major market attention likely to focus on the FOMC outcome, a disappointment may provide counter strength to the EUR while economic numbers are likely favoring continuation of the regional currency's advance unless printing pessimistic marks.
GBP Traders Should Watch UK CPI, Job Details And Retail Sales
Recent economic numbers from UK have been quite downbeat and has resulted into a short-term downtrend in GBP; however, key statistics from the Britain, like CPI, labor market numbers and Retail Sales, may give decisive information to forecast near-term GBP trend.
After two consecutive negative prints, November month CPI, scheduled for Tuesday release, is expected to mark the highest level in four months with +0.1% against -0.1% prior while the Retail Sales, strong contributor to the UK GDP, is also likely to reverse its prior declines of -0.6% with +0.6% during its Thursday's announcement. However, numbers relating to October Average Earnings and Unemployment Rate, coupled with November Claimant Count Change, scheduled for release on Wednesday, portray mixed clues for UK job market with unchanged 5.3% unemployment rate and weaker earnings at 2.5% against 3.0% prior, together with a cut in claimant count to 0.9K from 3.3K registered during previous month.
Weaker than expected inflation mark could join the slew of downbeat UK economics and can magnify recent GBP decline; however, improvements in labor market numbers, coupled with Retail Sales growth, could limit further downside by the Britain's currency.
Details From Japan, New-Zealand and Canada Are The Rest To Observe
On Monday, quarterly release of the Bank of Japan's "tankan" survey revealed that the Japanese firms are planning to hold their large investment intact, favoring expectations concerning no change of monetary policy during the Friday's Bank of Japan's monetary policy meeting. However, the central bank's survey also revealed that these firms feel gloomy outlook ahead and the same may force the Japanese central bank to utter some dovish marks, favoring JPY downside. Though, the safe-haven demand can continue restrict extreme downside by the Japanese currency.
Quarterly release of New-Zealand GDP, scheduled for Thursday release, is more likely to disappoint NZD traders considering recent downsides by the dairy prices and pessimistic outlook of the world's largest industrial player, China. The prior releases was of 0.4% mark and a weaker than the mentioned number could magnify NZD downside.
Other than the plunge in Crude prices, which largely govern the CAD downside, monthly releases of Tuesday's Manufacturing Sales, coupled with CPI & Wholesale Sales, scheduled for Friday release, can help determine immediate moves by the Canadian Dollar. While Sales numbers could continue marking pessimistic marks and magnify the CAD south-run, recent improvements in inflation prints may give breathing space to the Loonie, as it is nicknamed, from its on-going decline; however, further weakness by the Crude price, Canada's main export, might force the Canadian currency to extend its southward trajectory.
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