Forex Weekly Outlook – Fed set to rock all markets in a busy week

The US dollar has been on the back foot as the US and China got closer. The British pound extended its advance as Brexit is fading away, and the euro recovered from the ECB’s stimulus. What’s next? The Federal Reserve is in the spotlight in the upcoming week, but the BOE and the BOJ will also compete for attention. Here the highlights for the next week.

President Donald Trump is considering an interim deal with China – and for markets, it is the same as a full deal. The US dollar and the Japanese yen retreated and other currencies advanced. The pound was a winner as the bill that is designed to prevent a hard Brexit became law and early elections were averted. EUR/USD created a double-bottom as the ECB introduced a fresh stimulus, but then bounced back in a jolt of volatility. US data was satisfactory, with rising inflation, mixed retail sales, and a recovery in consumer sentiment.

1. Chinese Industrial Production: Monday, 2:00. The world’s second-largest economy suffered its slowest year growth in industrial output back in July, with an expansion of only 4.8%. An acceleration to 5.2% is projected now. The data has an impact beyond China’s borders as it impacts the global sentiment.

2. German ZEW Economic Sentiment: Tuesday, 9:00. The institute’s early release of its survey of around 300 investors and analysts has been on a free-fall in recent months. It hit a low of -44.1 points in August — reflecting substantial pessimism. Economists expect a minor increase to -38 points, still pointing an outright recession in the continent’s largest economy.

3.UK inflation figures: Wednesday, 8:30. Britain’s Consumer Price Index has been hovering around the 2% level — the Bank of England’s target — for several months. After surprising with an increase to 2.1% year on year in July, a drop to 1.8% is on the cards now. In the case of inflation significantly dropping, the pressure to raise rates will diminish. However, the fall of the pound during August may have pushed prices higher.

4. Fed decision: Wednesday, 18:00. The Federal Reserve is set to cut interest rates by 0.25% for the second time in a row. While the US and China have recently gotten closer, trade tensions have taken their toll and the job market has seen fewer job gains. Markets are fully pricing in a reduction, and Chair Jerome Powell refrained from pushing back against these projections. However, core inflation is on the rise and the US consumer remains robust — diminishing the case for further cuts. The dollar’s reaction hinges on the Fed’s “dot plot” — its forecast for future rate moves. If the dots and Powell — in his all-important press conference — downplay another cut, the dollar may rise. An open door to slashing rates in October and in December may weigh heavily on the greenback.

5. New Zealand GDP: Wednesday, 22:45. The nation publishes Gross Domestic Product figures only once — without any revisions — making every release substantial for the kiwi dollar. After reporting a growth rate of 0.6% in the first quarter, expansion has likely moderated to 0.4% in the second quarter. The RBNZ has recently cut rates by 50 basis points and is set to remain on the sidelines unless there is a risk of a recession.

6.Australian jobs report: Thursday, 1:30. The land down under has enjoyed an impressive increase in positions back in July — 41,100. A more modest increase of 15,200 is on the cards for August. The unemployment rate is expected to remain unchanged at 5.2%.

7.Japanese rate decision: Thursday, early in the morning. The Bank of Japan has only several hours to digest the Fed’s decision before it makes its own. While negative interest rates have been hurting commercial banks, there is growing pressure on the Tokyo-based institution to decrease its interest rate from -0.10% to -0.20%. The BOJ is competing with the Fed and with the ECB which are both easing their monetary policy. Governor Haruhiko Kuroda and his colleagues have very few tools in their shed.

8. UK rate decision: Thursday, 11:00. The Bank of England has its hands basically tied due to Brexit. While wage growth is robust and it would like to raise rates to combat potential inflation down the road, the BOE may have to slash rates if the UK leaves the EU without a deal and the economy tanks. In this September decision, the “Old Lady” is forecast to leave its interest rate unchanged at 0.75%. A unanimous vote is on the cards.