The Forex Week Ahead

USD Existing home sales (Wednesday): Home sales fell 2.8% m-o-m to an annualized 5490k in December, likely driven by a sharp drop in housing inventory level. The month’s supply indicator was down to 3.6-month supply in December, the lowest since January 2005. In January, there may have been some recovery as pending home sales, which tend to lead existing home sales, rebounded in December. Also, steady mortgage applications for home purchases in January and December suggest demand in the housing market may have sustained in January. Thus, we forecast existing home sales were up 1.1% m-o-m in January, acceleration to an annualized rate of 5550k. FOMC minutes (Wednesday): As expected, in the 31 January-1 February FOMC meeting, the Committee kept the target range for the federal funds rate at 0.5-0.75% with no substantive changes to the language on monetary policy.

New home sales (Friday): New home sales decelerated notably in December, registering an annualized rate of 536k, which is a 10.4% m-o-m decrease. In January, we expect new home sales to have rebounded. Mortgage applications for home purchases were up modestly in January. The sales of single family homes index in the National Association of Home Builders (NAHB) housing survey inched downward in January, but remained at an elevated level. Yet, the NAHB reported that industry headwinds such as labor shortage and supply-side constraints still persist. In addition, a sharp decline in new home sales in December warrants some positive payback in this volatile series in January. Therefore, we forecast an 8.2% m-o-m increase in to an annualized rate of 580k. University of Michigan consumer sentiment (Friday): The preliminary February estimate of consumer sentiment from the University of Michigan survey fell slightly from 98.5 to 95.7. The decline was largely due to a modest drop in consumer expectations for the future rather than the assessment of current conditions. The sharp partisan divergence in sentiment seen after the election widened again in this issue. Given the starkly partisan response to the election, the asymmetry in consumer responses raises questions about the degree to which the post-election bounce in consumer sentiment will translate into stronger spending. In the final estimate for February, we hope to learn some additional color on the development of consumer sentiment.

EUR Euro area flash PMIs (Tuesday): We expect the euro area composite PMI to tick up to 54.5 in February from 54.4 in January, signalling robust private sector activity in Q1. At the sector level, we expect a further improvement in the manufacturing PMIs consistent with a strengthening global recovery. Specifically, we expect the manufacturing PMI to increase for the sixth consecutive month to 55.4 in February following 55.2 in January. We expect the services PMI to remain unchanged from the January reading at 53.7. These outcomes for February would be consistent with Q1 GDP growth of 0.5% q-o-q suggesting some moderate growth acceleration from 0.4% q-o-q in Q4 2016. German Ifo (Wednesday): We expect the German Ifo business climate index to remain unchanged from the previous month at 109.8 in February. The current situation index however is forecast to exhibit a sixth consecutive monthly increase to 117.1 in February up from 116.9 in January. However, we expect the expectations index to decline modestly for the second consecutive month to 102.9 in February from 103.2 in January.

GBP UK Public finances (Tuesday): We expect PSNB ex public sector banks at -GBP13.8bn in January. January is always an important month for the public finances with self assessment income tax payments due. In addition, this is the last set of public finance data ahead of the Budget on 8 March. So far in the fiscal year to date (i.e. April/December 2016) the average improvement in the overall budget deficit relative to the same time in the previous fiscal year has been around GBP1.2bn per month. If that trend continues in the final three months of this fiscal year then the 2016-17 deficit (PSNB ex public sector banks) would come in at around GBP61bn, or around 3.1% of GDP. This compares with the GBP68bn/3.5% of GDP forecast that the Office for Budget Responsibility expected at the time of the November Autumn Statement, the improvement partly owing to revisions to the back data. UK Q4 GDP second estimate (Wednesday): The first estimate of Q4 economic growth published last month came in at 0.6% q-o-q and 2.2% y-o-y, marking the third consecutive quarter of 0.6% quarterly growth. We forecast an upward revision to 0.7% q-o-q and 2.3% y-o-y following the stronger-than-expected industrial production reading for December. Combined with a modestly stronger construction outturn too, this adds 0.05% to GDP relative to the first estimate – meaning there is a risk to our view that growth does not round upwards and remains at 0.6% q-o-q. Also in the second estimate look out for the expenditure detail of GDP – business investment in particular will be a key focus and how it has responded to Brexit-related uncertainty and the associated fall in sterling.

JPY January trade statistics: nominal exports (Monday): Nominal exports in the first 20 days of January rose 6.5% y-o-y (versus 0.2% in the first 20 days of December 2016), while nominal imports rose 5.3% (-0.7%). According to a Nikkei QUICK News report on 8 February, exports increased for auto parts and for semiconductors and other electronic parts, while imports increased for petroleum and telecom equipment.

AUD Wage data is released on 22 February (Wednesday) with the consensus looking for a small uptick in quarterly wage growth to 0.5% from 0.4%. On a y-o-y basis, wages are expected to rise 1.9%, as they did in Q3. Wage growth has been in a long-term downward trend in Australia since the mid-2000s. The unemployment rate at 5.7% suggests there is still spare capacity in the labour market, and the split of jobs growth is a concern. In the last 12 months, although 100k jobs were added, 160k were part-time jobs with a fall of 56k in full-time employment. This suggests wage pressures will remain subdued.

CAD Friday’s release of another round of inflation figures may incrementally inform BoC risks, but that’s unlikely to be a material effect. I think headline inflation will rise a tick to about 1.6% y/y. That would keep inflation below the BoC’s 2% target and well within the 1-3% policy band. The policy challenge facing the BoC was showcased in the recent speech by BoC Deputy Governor Lawrence Schembr. Two days prior to that, we’ll get retail sales for the month of December. We always caution on this report and the limited number of advance signals that can be used to put together a call, but it could easily face downside risks as CPI was up 0.3% m/m in December in seasonally adjusted terms.