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FX: This Week is About Brexit Plan B, FOMC, NFP

Posted on: 29 January 2019 , by: Boris & Kathy , category: Market Review

FX Weekly with Boris and Kathy

This will be an important week for the US dollar. The longest ever US government shutdown delayed many economic reports and investors are left with nothing but small glimpses into how the economy is doing.

That will change in the next few days with the Federal Reserve’s monetary policy statement and the Nonfarm payrolls report scheduled for release. Unlike other agencies, there will be no delays to NFP because the US Bureau of Labour Statistics is funded through September 30th. The market’s appetite for US dollars is always a key driver of FX flows, and we saw that last week when the greenback traded lower against all of the major currencies. Sterling was the best performer, hitting an 11-week high on the hopes that we’ll get a clear path forward after Parliament votes on Tuesday. The extension in stocks and improvement in risk appetite limited the gains in the Yen. Looking ahead, aside from FOMC and NFP, Bank of England Governor Carney speaks on Monday, the UK Parliament votes on Plan B on Tuesday, and Bank of Canada Deputy Governor Wilkins speaks on Friday. In terms of data, we’ll have our eyes on Australian and German inflation numbers, Eurozone and US Q4 GDP numbers and Chinese PMIs.

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US DOLLAR

Data Review

  • Existing Home Sales 4.99M vs. 5.24M Expected
  • Jobless Claims 199K vs. 218K Expected
  • US Markit Composite PMI 54.5 vs. 54.4 Previous

Data Preview

  • Consumer Confidence index – Potential downside surprise given sharp drop in University of Michigan Consumer sentiment Index
  • Q4 GDP – Hard to tell given delay of US data releases but growth likely to be weaker towards end of year
  • Federal Reserve Rate Decision – No changes from the central bank but beware of cautious outlook
  • Personal income and spending – Potential for upside surprise as stronger earnings meets healthy holiday spending
  • Nonfarm payrolls – Pullback likely after last month’s strong rise
  • ISM Manufacturing index – Upticks seen in the Philadelphia region offset by weakness in NY

Key Levels

  • Support 108.00
  • Resistance 110.00

Don’t Expect the Fed to Help the Dollar

After being shut down for 35 days, President Trump announced on Friday that a deal has been reached to reopen the government for 3 weeks until 15th of February. In this time, he expects both Democrats and Republicans to work together on a Homeland Security package that will include funding for border walls. The agreement will include back pay for furloughed workers, which is good news but the debate on the wall will resume in a few weeks and having gotten what they wanted with very little concessions, the Democrats won’t turn around and support border funding easily. Risk currencies rallied after Trump’s announcement, but the US dollar pulled back as investors finally look forward to an onslaught of economic releases that should confirm the slowing economy.

With that in mind, the latest US economic reports haven’t been terrible. Jobless claims fell below 200K for the first time in 49 years. The 4-week moving average also dropped to its lowest level since November. Although this state-based reading does include federal workers, it reflects a strong tight labour market. Larry Kudlow said that according to these figures, January payrolls could be up a significant amount. Now it will be difficult to exceed the more than 310K jobs created in December, but anything more than 200K should be good for the dollar. As for the Federal Reserve’s monetary policy announcement, no changes are expected, but this year Fed Chair Powell will hold a press conference after every meeting. This means even if policy remains unchanged, the market will get an updated assessment on the economy but don’t expect the Fed’s view to change. Many economic reports have been delayed, and the ones that have been released show the economy is weakening. Taking a look at the table below since December, consumer sentiment measures declined, inflation is lower and economic activity is slower. The labour market remains the primary source of strength but with hundreds of thousands of furloughed workers, the real numbers this month (federal + state) are probably much worse. We expect Powell to maintain a cautious tone that will hurt more than help USDJPY.

Eurozone Economy- Central Bank Meeting


EURO

Data Review

  • ECB Keeps Policy Unchanged Says Risks to Downside
  • Germany PPI -0.4% VS. -0.1% Expected
  • Germany ZEW Current Situation 27.6 vs. 42 Expected
  • Germany ZEW Expectations -15 vs. -18.6 Expected
  • Germany PMI Manufacturing 49.9 vs. 51.1 Expected
  • Germany PMI Services 53.1 vs. 52.1 Expected
  • Germany PMI Composite 52.1 vs. 51.9 Expected
  • German IFO Business climate 99.1 vs. 100.7 Expected
  • EZ ZEW Expectations -20.9 vs. 21 Expected
  • EZ PMI Composite 50.7 vs. 51.4 Expected

Data Preview

  • Eurozone Confidence – Potential for downside surprise given lower ZEW, IFo and PMIs
  • German CPI – Potential for upside surprise as the recovery in oil helps CPI
  • German Unemployment – Potential for downside surprise as employment growth eased to the slowest since Dec 2016 according to PMIs
  • EZ Q4 GDP – ECB is worried about growth so these numbers should be lower
  • EZ CPI Estimate for Jan – Could be a hair stronger given lower euro and higher oil prices

Key Levels

  • Support 1.1300
  • Resistance 1.1500

Euro Unfazed by ECB’s Cautious Outlook

At their first monetary policy meeting of the year, the European Central Bank downgraded their outlook for risk but instead of falling the euro soared. Of course, it didn’t play out that way exactly because euro dropped below 1.1300 a few hours after the monetary policy announcement and did not start ratcheting higher until the London open on Friday. This recovery was surprising considering that it coincided with comments from 2 ECB officials that suggest the central bank could lower their GDP forecast at the March meeting. According to the Mario Draghi, the risks “have moved to the downside” which is a significant change from their previous view that the risks are “broadly-balanced.” The decision to make this change was unanimous and motivated by the “persistence of uncertainties, in particular, relating to geopolitical factors and the threat of protectionism.” Although the central bank head also sees inflation rising in the medium term, by changing their risk assessment, they are telling us that rate hikes could be delayed even further. If the risks intensify by their meeting in March, further action could even be taken. All of the latest economic reports from the ZEW, PMIs to IFO showed weakness and the only reason why the euro is up is because the dollar is down, and risk appetite is stronger. This could be enough to carry EURUSD higher in the coming week. Data wise, there is a number of releases that could affect how the euro trades from German CPI, unemployment and Eurozone Q4 GDP. Technically the strong recovery on Friday signals broader gains in the week ahead.


BRITISH POUND

    Data Review

    • Rightmove House Prices 0.4% vs. -1.5% Previous
    • Jobless Claims 20.8K vs. 24.8K Previous
    • Average Weekly Earnings 3.4% vs. 3.3% Expected
    • ILO Unemployment Rate 4% vs. 4.1% Expected

    Data Preview

    • UK PMI Manufacturing Index – Potential downside surprise after the Confederation of British Industry’s report of less orders

    Key Levels

    • Support 1.3000
    • Resistance 1.3300

    Parliament Votes on Plan B Jan 29th

    When it comes to Plan B, Prime Minister May disappointed in every single way, but instead of falling, sterling soared to its strongest level versus the U.S. dollar in 11 weeks. May did not request to extend Article 50, did not rule out a no-deal Brexit and opposed a second referendum. She said she would discuss the Irish backstop with lawmakers and take their conclusions for discussions back to the EU. On Tuesday, Parliament will be voting on May’s Plan and alternatives proposed by other lawmakers including delaying the March 29 exit. Sterling rallied on Friday on reports that the DUP could support her deal if it includes a “specifically time-limited backstop.” The DUPs fear that if she loses the vote and Parliament takes over Brexit negotiations, they’ll get an exit that could be far less desirable. Even so, the market is operating on the notion that a no deal Brexit won’t happen and regardless of whether May wins or loses, the only reasonable outcomes at this stage are a soft Brexit or second referendum. According to Commons leader Andrea Leadsom, the EU is open to giving the UK a couple of extra weeks past the March 29th deadline.

    There are 4 reasons why sterling is soaring in the face of Brexit uncertainty – hope for a soft Brexit, stronger UK data, US dollar weakness and short covering. GBPUSD fell 9% from its peak in 2018 and this year’s 3% recovery is only a fraction of that move. In the week ahead, depending on how the vote goes, Brexit will remain a key driver of sterling flows, but US data will matter as the market digests Fed Chair Powell’s comments and the NFP report. This past week we learned that the UK labour market is doing very good with wages rising. On Friday, we will get a glimpse of how the manufacturing sector has been performing. Technically, there’s no doubt that GBPUSD is in an uptrend, but there’s a lot of resistance between 1.3175 and 1.3250.


    AUD, NZD, CAD

    Data Review

    Australia

    • Westpac Leading Index -0.21% vs. -0.09% Previous
    • Employment Change 21.6K vs. 18K Expected
    • Full-Time Employment Change -3K vs. -7.3K Previous
    • Unemployment Rate 5% vs. 5.1% Expected

    New Zealand

    • PMI Services 53 vs. 53.5 Previous
    • CPI 0.1% vs. 0% Expected
    • Credit Card Spending -0.5% vs. 0.4% Previous

    Canada

    • Manufacturing sales -1.4% vs. -1% Previous
    • Retail Sales -0.9% vs. -0.6% Expected
    • Retail Sales ex autos -0.6% vs. -0.4% Expected

    Data Preview

    Australia

    • CPI – Potential for downside surprise given drop in consumer inflation expectations
    • PMI Manufacturing Index - Potential for downside surprise given continued weakness in China
    • PPI - Potential for downside surprise given drop in oil prices at the end of the year

    New Zealand

    • Trade Balance - Potential for upside surprise given strong manufacturing activity

    Canada

    • GDP - Potential for downside surprise given significantly weaker retail sales and trade balance

    Key Levels

    • Support AUD .7100 NZD .6700 CAD 1.3200
    • Resistance AUD .7200 NZD .6900 CAD 1.3400

    NAB Rate Hike Causes AUD to Lag Behind NZD

    There continues to be a major divergence in the performance of the Australian and New Zealand dollars. AUD ended the week unchanged against the greenback while NZD soared more than 1% and was the second-best performer behind sterling. This move drove AUD/NZD to its lowest level in 3 weeks. Australian data was actually pretty good with the economy adding more jobs than forecasted in December. The unemployment rate also fell back down to 5%, which is the lowest level since 2009. Unfortunately, ongoing tensions between the US and China and a hike in home loan rates by the National Australia Bank prevented AUD from participating in the risk on rally. NAB is the last of the four major banks to raise rates so economically and psychologically, the impact should not have been that significant on AUD. Nonetheless, actions like this make it incredibly difficult for the Reserve Bank to consider monetary tightening. This week consumer and produce price reports are scheduled for release and these inflation measures should give the RBA even more reasons to keep policy steady. With that in mind, however, the primary drivers of AUD and NZD flows last week was US dollar weakness and risk appetite and these factors could continue to have the greatest influence in the week ahead. Stronger than expected CPI data helped to lift NZD, but weaker service sector activity and credit card spending shows underlying weakness in New Zealand’s economy.

    The Canadian dollar also ended the week unchanged after hitting 2-week lows and then recovered strongly on Friday despite a steep fall retail sales. Consumer spending dropped -0.9% in November, the most in 7 months as gas prices fell and automobile purchases declined. November GDP numbers are due for release this week and given the latest retail sales and trade balance reports a contraction is expected. USDCAD is poised to extend its slide below 1.32.


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