Forex Weekly Outlook – Explosive week with Fed, ECB, UK elections

The US dollar was kicked lower at the beginning of December amid unimpressive data. The Fed now determines the next greenback move, Lagarde presides over her first ECB rate decision, and Brits decide if it’s Johnson or Corbyn. Here the highlights for the upcoming week.

US ISM Manufacturing Purchasing Managers’ Index fell short of expectations and showed that the US industrial sector is still struggling. Sino-American trade talks seem to be stuck. Labour narrowed the gap with the Conservatives but seemed to have too much ground to cover.

  1. UK GDP: Tuesday, 9:30. While monthly Gross Domestic Product reports usually gain less traction than quarterly ones, this report for October is the last one before the elections and may have an outsized impact. The UK escaped a recession in the third quarter as output expanded by 0.3%. However, the past two months saw contractions – 0.2% in August and -0.1% in September. Another squeeze may dent the Conservatives’ chances of winning and thus weigh on the pound.
  2. German ZEW Economic Sentiment: Tuesday, 10:00. Similar to the UK GDP, EUR/USD often shrugs off ZEW’s business survey. Still, this publication is different – coming before Christine Lagarde’s first decision as President of the European Central Bank. Economic Sentiment stood at -2.1 in November – an improvement in comparison to the recent past – but still within negative territory. It may cross the zero mark and reflect optimism instead of pessimism in this last report for 2019.
  3. US inflation: Wednesday, 13:30. The Consumer Price Index (CPI) report is out just hours before the Federal Reserve’s decision and may impact the tone. Back in November, Core CPI disappointed by sliding to 2.3% yearly, losing steam after a few robust months. Consequently, Core PCE – the Fed’s favorite gauge of inflation – dropped to 1.6%, getting further away from the 2% target. A similar score is likely now. Monthly Core CPI advanced by 0.2%, and it is expected to be same as well.
  4. Fed decision: Wednesday, 19:00, press conference at 19:30. After three consecutive rate cuts, the world’s most powerful central bank is set to hold its fire in the last meeting of 2019. Jerome Powell, Chairman of the Federal Reserve, has recently said that he sees the economy as a “glass more than half full.” However, not all economic indicators have been favorable, with manufacturing still a drag. The Fed’s comments on inflation and employment – responding to the Non-Farm Payrolls – will be of interest, as these are the bank’s mandates. However, the Washington-based institution’s forecast for interest rates
  5. UK elections: Thursday, exit polls at 22:00, full results on Friday morning. Brits are called to vote in a national survey for the fourth time in as many years and after just half the usual parliamentarian term. The House of Commons’ twists and turns around Brexit are seen as the main reason that Prime Minister Boris Johnson’s convinced others to opt for an unusual winter election. Investors prefer the PM’s Conservatives to win an outright majority, leading to the ratification of his Brexit accord and market-friendly policies. Jeremy Corbyn, Labour’s leader, wants to renegotiate a softer version of leaving the EU and to allow a referendum, with Remain being on the table. While markets wish to cancel Brexit altogether, they fear the uncertainty of renegotiating the deal, the governability of a coalition or minority government that would emerge, and, most importantly, Corbyn’s hard-left policies. Here are five scenarios:
    1) A landslide majority, such as of 68 votes that YouGov projected in its MRP poll, would be an optimal outcome that would send sterling higher.
    2) A small majority could also be pound positive, but if Johnson has to depend on hard Brexiteers, GBP/USD may eventually drop after an initial gain.
    3) The third option is a hung parliament with the Tories scrambling to make a deal with the Northern Irish Democratic Unionist Party (DUP). This time, the small faction will probably demand more than the previous agreement with his predecessor Theresa May. However, if a government is formed, sterling could rise after an initial drop.
    4) The fourth option is that Labour could form a coalition or a minority government. If the Liberal Democrats are in a position to condition collaboration on having a different PM instead of Corbyn, the initial downfall of the pound could be followed by a surge.
    5) The fifth option is that Corbyn enters Downing Street. In this case, sterling may stumble significantly.
    The UK elections are held when markets are open, and a new government may be formed on Friday, so volatility could be significant throughout the night and also during all of Friday.
  6. Swiss rate decision: Thursday, The Swiss National Bank has been holding its Libor Rate unchanged for nearly five years – since it removed the floor under EUR/CHF – dropping the “SNBomb.” It has pledged to intervene in exchange rate markets to weaken the franc but has refrained from doing it so on a broad basis in recent years. It will likely remain as such in the upcoming meeting. Any changes to its intentions may impact not only the franc but also the euro. The SNB removed its floor in anticipation of the QE from in the euro-zone.
  7. ECB decision: Thursday, 11:45, press conference at 12:30. Christine Lagarde presides over her first rate decision amid a growing dispute over the bank’s loose monetary policy. While Lagarde is a dove that supported Quantitative Easing and low interest rates, she has struck a calm tone in her first public appearances. The French politician aims to bring unity to the bank and is unlikely to make any radical decisions. Nevertheless, and despite her vast political experience, the former Managing Director of the International Monetary Fund may slip unwanted comments in her first press conference, moving markets. Her call on governments to do more – a staple of Draghi’s statements – will be of high interest.
  8. US retail sales: Friday, 13:30. While markets will be digesting the British political developments, the all-important consumption report from the US is set to move the dollar. Consumption consists of 70% of the US economy, and the indication of how Black Friday was received will be of interest. Sales increased by 0.3% in October while core sales advanced by 0.2%. The Control Group is also of importance.

*All times are GMT

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