The Week Ahead: Fed, ECB, and BoE Take Center Stage

The US jobs report for November was released on Friday. Although the headline non-farm payrolls number came in significantly better than expected at 228,000 jobs added in November against a prior consensus forecast of around 200,000 jobs, wage growth turned out lower than expected. Average hourly earnings month-over-month rose by only 0.2% (2.5% for the year) against the prior consensus of 0.3% (2.7% for the year). In addition, monthly average hourly earnings for October was revised down from flat to -0.1%. The unemployment rate for November remained steady as expected at the long-term low of 4.1%.

The lower-than-expected wage growth data extended concerns over persistently lagging inflation that could ultimately serve as an obstacle to the Federal Reserve’s path of tighter monetary policy into 2018. As a result, the US dollar initially took a modest hit in the immediate aftermath of the jobs release. However, the tepid data is highly unlikely to deter the Fed from raising interest rates by 25 basis points in the coming week during its highly anticipated December FOMC meeting, especially since headline job growth has continued to display such strength. Futures markets continue overwhelmingly to expect a Fed rate hike next week, and the dollar regained some of its composure shortly after the jobs release, with the US dollar index pushing back up towards the key 94.00 handle.

In the week ahead, the dollar should continue to be moved by anticipation of US fiscal policy progress, most notably with respect to tax reform. Expectations that a new tax reform bill may potentially come to fruition by the end of the year have been partly responsible for the dollar’s rebound and rally within the past two weeks. Perhaps more critical for the dollar in the week ahead, however, will be the noted FOMC meeting, which concludes on Wednesday. As mentioned, a 25-basis-point rate hike, which would be the third this year, is widely expected by the markets. Of course, in the unlikely event that the Fed defies expectations by failing to raise rates on Wednesday, the dollar is likely to take a rapid and sustained plunge. Assuming, however, that there is indeed the expected rate hike, the Fed’s policy wording and outlook will be of critical importance for policy expectations into next year. Markets will be looking primarily for any clues as to the future path of monetary policy that may be gleaned from the Fed’s statement, press conference, and economic projections (which include the “dot-plot” forecasts of future interest rate changes by Fed officials).

Aside from Wednesday’s Fed decision, the week ahead will also feature decisions from other major central banks, including the European Central Bank, Bank of England, and Swiss National Bank, all on Thursday. None of these three central banks is expected to make any interest rate changes at that time, but their policy statements, as always, will likely have a significant impact on their respective currencies. Other than the parade of central banks issuing their statements and decisions, the busy week ahead will also be highlighted by key economic data releases, including inflation data from the UK (CPI) and US (CPI and PPI), retail sales numbers from the US and UK, and jobs data from the UK and Australia.

Here are some of the key events scheduled for the week ahead:

Tuesday, December 12:

• UK Consumer Price Index (Y/Y)
• US Producer Price Index (M/M)

Wednesday, December 13:

• UK Average Earnings Index (3M/Y), Claimant Count Change, and Unemployment Rate
• US Consumer Price Index (M/M)
• US FOMC Federal Funds Rate, Statement, Press Conference, and Economic Projections

Thursday, December 14:

• Australia Employment Change and Unemployment Rate
• Swiss National Bank Libor Rate, Monetary Policy Assessment, and Press Conference
• UK Retail Sales (M/M)
• Bank of England Official Bank Rate, Monetary Policy Summary, and MPC Official Bank Rate Votes
• European Central Bank Minimum Bid Rate and Press Conference
• US Retail Sales (M/M)