The US dollar was on the retreat at first, but then made an impressive recovery, as the gloom returned. The main event of the upcoming week is the decision by Ben Bernanke. Will the Fed introduce more monetary easing? In addition, German ZEW Economic Sentiment, and the US Trade Balance are among the main market-movers this week. Here is an outlook on the coming events to shape forex trading.
Last week Non-Farm Payrolls came out better than expected with a 146,000 job gain and a nice drop in unemployment rate, down to 7.7% from 7.9% in October, the lowest since December 2008. However these positive readings are probably not enough for the Federal Reserve, since a wider view on the US job market shows a decline in the participation rate and an extremely high level of real unemployment rate, all of which could prompt the Federal Reserve to continue its easing measures. Will the Fed announce new measures in its next meeting? In Europe, Draghi dragged the euro lower, by hinting of a potential rate cut and lowering forecasts. Also the German Bundesbank joined later by lowering Germany’s economic forecasts. Let’s start:
- German ZEW Economic Sentiment: Tuesday, 10:00.German investors’ sentiment dropped by 4.2 points in November to -15.7 points, following a -11.5 reading in the previous month. Many expected the economy would worsen rather than improve in the next months, indicating a recession mood among European business-people. The reading missed expectations for an improvement to -9.9. An improvement to -11.4 is expected now.
- US Trade Balance: Tuesday, 13:30. The U.S. trade deficit narrowed to the lowest level in nearly two years, due to a sharp rise in exports. The deficit narrowed to $41.5 billion in September from $43.8 billion in August, amid a 3.1% surge in exports. The lower deficit helped boost the GDP figure. However analysts warn that this pick could be temporary due to the ongoing recession in the Eurozone. A larger deficit of -42.4 is anticipated this time.
- UK employment data: Wednesday, 9:30. The UK’s important jobs report showed that Claimant Count Change climbed unexpectedly by 10,100 claims in October, following 800 claims in September. Economists expected a contraction of 500 claims. A smaller rise of 5,100 claims is expected now.
- US rate decision: Wednesday, 17:30, followed by projections at 19:00 and a press conference with Ben Bernanke at 19:15. Assuming there is no instant deal regarding the the fiscal cliff, we can expect more action from the Fed now that the elections are over. The FOMC is likely to introduce more monetary stimulus as the extension of Operation Twist nears its end. This could take a form of more outright monthly purchases of Treasuries (QE4 or QE-Infinity 2) in a scale of of $30-40 billion per month, in addition to the current program of purchasing MBS at the scale of $40 billion per month(QE3 or QE Infinity). Operation Twist will likely be retired.The current dovish composition of the Fed can easily find negative signs concerning the US economy, and can ignore the positive signs. Officials are not satisfied with the employment situation: the participation rate is still low, and the unemployment rate including discouraged workers remains high, despite some improvements. While the impact of more monetary easing at this point is questionable, the Fed would probably prefer to do something when it has a chance. The end of Operation Twist provides a chance.The impact on the dollar could be negative at first. Afterwards, we could see a “buy the rumor, sell the fact” reaction.
- US FOMC Economic Projections: Wednesday, 19:00. Together with its September meeting, The FOMC generated a statement, on its projections for key economic indicators, including GDP growth, unemployment, and inflation. In September, projections for real GDP growth for 2012 were between 1.7% to 2.0%, following 1.9% to 2.4% in the June forecasts. The outlook for next year is even lower than it was earlier in the year, as the central tendency of the projections for 2013 has come down from 2.8% to 3.2% in January to 2.5% to 3.0% in September.
- Federal Budget Balance: Wednesday, 19:00. The Federal Government budget deficit increased to $120.0 billion during October following $75.2 billion in the previous month. Economists expected a lower deficit of $113.5 billion. On a yearly base deficit was larger than the $98.5 billion registered in the last fiscal year.
- Switzerland rate decision: Thursday, 8:30. The Swiss National Bank maintained their interest rate at 0.25% worried about the strength of the Swiss franc and its negative effect on the economy. Nevertheless the Swiss franc is still considered a safe-haven asset for investors in face of the ongoing European crisis. No change is forecast in the rate or in the 1.20 floor under EUR/CHF. The recent negative CPI cemented the floor.
- US retail sales: Thursday, 13:30. Americans reduced their spending in October, down 0.3% from September’s 1.3% gain. Two possible reasons are the uncertain regarding economic outlook and Superstorm Sandy decreasing car sales and weighing on business. Auto sales dropped 1.5%, the most in more than a year. Meanwhile Core sales, excluding the volatile categories of autos, gas and building materials, remained flat. That followed 1.2% gain in September. Further worries amount as the tax cuts may expire at the end of the year unless the Congress and the White House fail to reach a budget deal before then. Retail sales are expected to gain 0.4, while Core sales are forecasted to drop 0.1%.
- US PPI: Thursday, 13:30. Producer Prices dropped 0.2% in October, following 1.1% increase in September. The main reason for the fall in PPI was the decline in oil price. This was the first drop after five consecutive months of gains. A decline of -0.4% is forecasted.
- US Unemployment Claims: Thursday, 13:30. The number of Americans filing initial claims for unemployment aid dropped sharply last week following the temporary spike caused by Superstorm Sandy has faded. Unemployment claims declined 25,000 to 370,000 while analysts expected a reading of 378,000, indicating a rapid recovery in the US job market. However the storm’s effects are still visible in the four-week average rising to 408,000. The same reading of 370,000 is predicted.
- US inflation data: Friday, 13:30. Inflation pressure were reduced in October with a modest rise of 0.1% following a 0.6% climb in August and in September, caused by falling gasoline prices. Meanwhile Core CPI excluding volatile food and energy costs increased 0.2%. Inflation is expected to remain 0.2%.
That’s it for the major events this week. Stay tuned for coverage on specific currencies
*All times are GMT.