Fed’s interest rate decision and US employment data in focus

Market worries about the Israeli conflict are still present yet the market’s attention may shift somewhat in the coming week, given the high-impact monetary policy events and financial data due out. On the monetary front, we highlight the release of the Fed’s interest rate decision on Wednesday, yet also highlight the interest rate decisions of BoJ (Tuesday) and BoE (Thursday) and note that also that Norway’s Norgesbank and the Czech Republic’s CNB (both on Thursday as well) are to reassess the suitability of their current monetary policy settings. As for financial releases, we make a start on Monday, with the release of Australia’s retail sales for September, Sweden’s GDP rates for Q3, Switzerland’s KOF indicator for October and Germany’s Preliminary HICP rate for the same month. On Tuesday we note the release of Japan’s preliminary industrial output for September, China’s NBS manufacturing PMI figure for October, Germany’s preliminary GDP rates for Q3 and the Eurozone’s and France’s preliminary GDP rates for Q3 and preliminary HICP rates for October, Canada’s GDP rates for August and the US consumer confidence for October. On Wednesday we note the release of China’s Caixin manufacturing PMI figure for October, the US ISM manufacturing PMI figure for the same month and just before Thursday’s Asian session starts we get New Zealand’s employment data for Q3. On Thursday we start with Australia’s trade data for September, UK’s Nationwide House prices for October, Switzerland’s CPI rates for the same month and from the US, the weekly initial jobless claims figure and Factory orders for September. Finally, on Friday, we highlight the release of the US employment report for October and note the release of Turkey’s CPI rates for October and Canada’s employment data for the same month.

USD – Fed’s interest rate decision and October’s employment data

The USD seems about to end the week stronger against its counterparts despite some hesitation on behalf of the bulls at the start of the week. On a monetary level, we highlight the Fed’s interest rate decision next Wednesday. The bank is widely expected to remain on hold and Fed Fund Futures currently imply a probability of 98.4% for such a scenario to materialize. Furthermore, the market seems to expect that the bank has reached its terminal rate and may start cutting rates by July next year. The next point of interest is expected to be the Fed’s accompanying statement and Fed Chair Powell’s press conference later on, as the market will be searching for clues about the bank’s future intentions. Should the bank allow for hawkish elements to escape, possibly underscoring that rates are to remain at high levels for a long period, or imply that more tightening is in the pipeline, we may see some support for the USD building up as that would contradict the market’s expectations for the bank to remain on hold in the coming months. On the flip side should the bank sound satisfied with the current monetary policy settings, it may reinforce the market’s expectations that the bank is to remain on hold and thus may weaken the USD. Please note that the release is to have wider ripple effects, beyond the FX market, probably affecting also US stockmarkets and the price of gold. On a macroeconomic level, we highlight the jump marked by the US GDP advance rate for Q3. The release tended to strengthen the notion that the US economy may be able to avoid a recession while at the same time providing more leeway for the Fed to keep rates at high levels for a prolonged period. The improved economic activity was also evident by the release of the preliminary PMI figures for October, which showed an increase in economic activity across sectors for the current month, another positive signal for the US economy. With the US Core PCE rates for September still to be released, we note the release of the US employment report for August next Friday. Should the release show a tight US employment market we may see the USD getting some support, as once again it would highlight the resilience of the US employment market and allow the Fed for more tightening if it wants to.

GBP – BoE’s interest rate decision in focus

The pound is about to end the week lower than the USD yet relatively unchanged against the EUR and JPY. On a macroeconomic level, we note that August’s employment data implied a relatively tight UK employment market, given that the unemployment rate ticked down, while the employment change figure remained in the negatives yet improved. Nevertheless, the claimant count figure rose and tended to disappoint GBP trades, as it implied increased layoffs in September. On the other hand, we note another contraction of economic activity, across sectors, as implied by the release of the preliminary PMI figures for October, which also was a negative sign for the UK economic outlook, while the worse-than-expected figures of the CBI indicators for October tended to imply more difficult days ahead, both on an industrial and a retail level. Overall the macroeconomic outlook seems to weigh on the pound somewhat and we expect that tendency to be maintained in the coming months. On a monetary level, we highlight the release of BoE’s interest rate decision next week. The bank is expected to remain on hold, keeping rates unchanged at 5.25% and currently, GBP OIS imply a probability of 91.91% for such a scenario to materialize. The market also seems to expect the bank to remain on hold until Fall next year and then cut rates. We note that despite the CPI rate slowing down at prior stages of the bank’s monetary policy tightening has stabilized in September at 6.7% yoy and is still way off the bank’s 2% inflation target, thus adding pressure on BoE for more monetary policy tightening. Let’s not forget that the decision to remain on hold in the last meeting was taken with the marginal majority of one vote and thus could be overturned in the next meeting. Should the bank remain on hold as expected we may see the market’s attention turning towards BoE’s accompanying statement. Should the accompanying statement include hawkish elements predisposing the market for another possible rate hike, we may see the pound getting some substantial support while any signs that the bank has no intention currently to raise rates may weaken the pound as the market’s expectations may solidify.

JPY – BoJ to remain on hold

JPY is about to end the week slightly weaker against the USD, yet remains relatively unchanged against the EUR and GBP. We highlight that USD/JPY was able to surpass the level of 150.00, a scenario that enters the pair into the territory of a possible market intervention by Japan. It should be noted that the Japanese Finance Minister Suzuki had warned traders not to sell the Yen as authorities were closely watching moves, yet he declined to comment on the possibility of a market intervention. Overall the situation has become more pressing as the Yen has become a target for short sellers, given also that higher interest rates worldwide are increasing the pressure on BoJ to act, as one of the main reasons behind JPYs’ weakening is the bank’s ultra-loose monetary policy. Hence we highlight the release of BoJ’s interest rate decision next Tuesday. JPY OIS implies a probability for the bank to remain on hold at 94.73% while also implying that the market expects the bank to remain on hold in the December meeting as well. Should that be the case we may see the market attention turning towards the peripherals of the interest rate decision. One key element would be whether the bank is to raise its tolerance level of the yield curve to actually proceed with bond-buying operations. Currently, BoJ tolerates a 1% yield and proceeds to bond purchases once JGB yields rise higher than the prementioned cut-off point. Should the bank raise the tolerance level, we may see JPY getting some support, while any dovish comments could weigh on the Japanese currency. We note that on a macroeconomic level, economic activity in the crucial manufacturing sector seems to have suffered another hit in October which does not bode well for Japan’s economic outlook and in the coming week we note the release of the preliminary industrial output for September for further clues on economic activity. On the inflation front, Tokyo’s CPI rates for October unexpectedly accelerated for October in an indication of what is to follow on a nationwide level.

EUR – GDP and HICP rates targeted

The common currency seems about to end the week lower against the USD, yet remained relatively unchanged against the JPY and GBP. The weakness of the EUR may have also been caused by the ECB’s interest rate decision yesterday. The bank as was widely expected remained on hold and in its accompanying statement, reiterated that the current level of rates is sufficient to bring inflation back down to its 2% target while also mentioning that it intends to remain data-dependent. Overall with the exception of Lagarde stating that to be on hold does not mean that there are not to be any rate hikes in the future, there were not substantial signs that the bank is about to leave that position and thus tended to solidify the market’s expectations that the ECB has reached its terminal rate, thus weakening the EUR. On a macro-economic level, we highlight that economic activity has suffered another contraction in every sector of Germany and France, but of the Eurozone as a whole as well. The release of the preliminary PMI figures for October tended to weaken the common currency as the economic outlook of the trading bloc seems to be darkening. At this point, we also note the pessimistic sentiment of the average Eurozone consumer for October which may adversely affect the retail sales rate in the future, something that was underscored also by more pessimism among German consumers for November. On a more positive note, Germany’s Ifo indicators tended to imply some improvement in the economic outlook but also in the conditions on the ground. In the coming week, we highlight the release of the preliminary GDP rates for Q3 and HICP rates for October. Any acceleration could provide some support for the common currency and vice versa, any slowdown could weigh.

AUD – Trade and Chinese data to move the Aussie

AUD is about to end the week in the reds against the USD, as the market sentiment seems to be turning more cautious on a fundamental level and thus is weighing on the commodity currency, which is considered to be a more risky asset. We expect on a fundamental level that should the market sentiment turn more risk-averse in the coming week, the market sentiment may continue to weigh on the AUD. On a macroeconomic level, we note that economic activity seems to have contracted in both the manufacturing and services sectors, a negative sign for Australia’s economic outlook. Furthermore, Australia’s CPI rates for Q3 slowed down yet seem to have landed slightly higher than what the market expected. On a monetary level, RBA Governor Bullock stated
regarding the slowdown of the CPI rates that “The print came out a little higher than we’d been forecasting at our August statement on monetary policy…but it was pretty much where we thought it would come out, given the information we’d come into since then, particularly the monthly CPI indicator, so we thought it was going to be about where it came out”. It should be noted that the market now, only marginally prices in that the bank is to remain on hold in its next meeting, early November, while it increasingly expects the bank to hike rates before year’s end. Should there be further indications for a possible rate hike by the bank, we may see some support gathering for the Aussie. Otherwise, Aussie traders are expected to keep a close eye on the release of Australia’s trade data and whether the country was able to add more wealth to its economy from its international trading activities. Thus a widening of Australia’s trade surplus for September may add more support for the Aussie. On the other hand, given the close economic ties between Australia and China, we also note the release of China’s manufacturing PMI figures for October and a possible rise of the indicators’ readings could signal an increase in economic activity for the huge Chinese manufacturing sector and thus more exports of Australian raw material to China.

CAD – Canada’s October employment data to shake the Loonie

The Loonie is about to end the week lower against the USD as the market sentiment tends to weigh on the commodity currency. Yet also the drop in oil prices for the week may have contributed to the weakening of the CAD. We note that oil prices seem to have stabilized for now at lower levels than when the week began, yet an escalation of the Israeli conflict is possible at any given moment and could push oil prices higher. On the other hand, a boost to the supply side of the international market may allow for oil prices to fall. For the time being the main issue for oil prices on a fundamental level, seems to remain the conflict in Israel. On a monetary level, BoC’s interest rate decision failed to provide some support for the Loonie. The bank as was widely expected remained on hold at 5.00% yet in its accompanying statement warned that more tightening may lay ahead. For the time being the markets seem to be betting that the bank has reached its terminal rate case scenario that tends to weigh on the Loonie. Furthermore, we note that after the release BoC governor Macklem stated that the bank may not have to raise rates further, a statement that is in accordance with the market expectations. Further signs of the bank intending to remain on hold may weigh on the Loonie in the coming week. On a macroeconomic level, we note that the business barometer dropped even lower for October, while in the coming week, we note the release of August’s GDP rate and highlight the release of October’s employment data next Friday. Any indications that the Canadian employment market remains tight may provide some support for the Loonie and vice versa.

General Comment

We expect in the coming week the USD to maintain the initiative over other currencies in the FX market, yet given that we expect also a wide number of monetary policy events and high-impact financial releases outside the US, that relationship may be interrupted at certain points. Beyond the FX market, we still see increased market interest in the US stock markets given the earnings releases of high-profile companies and in the coming week, we note the release of the earnings reports of McDonalds (#MCD) on Monday, Pfizer (#PFE) on Tuesday, PayPal (#PYPL) and Airbnb (#ABNB) on Wednesday and Ferrari (#RACE), Starbucks (#SBUX), Coinbase (#COIN) and Apple (#AAPL) on Thursday. It should be noted that the downward movement of the US stock markets is characteristic of the markets’ mood and we expect it to continue for the time should the market worries remain or even intensify. On the other hand, Gold’s price seems to have hit a ceiling despite the bullish tendencies being present. The strength of the precious metal’s price seems to be feeding by increased safe-haven inflows, given the Israeli conflict, yet may have been limited by the strengthening of the USD. Yet at this point, we would like to express our intense concerns about the situation in the Middle East. As the week began, market worries for a possible escalation tended to ease, as hopes for a possible diplomatic solution may not have been dominant, yet were enhanced. Yet the IDF ground operations in northern Gaza may have been a painful reminder that the possibility of an escalation of the conflict is still the most likely scenario. Yet the extent of such a possible escalation is still unknown. A land operation of Hezbollah, with Israel finding itself fighting on two fronts, is a quite plausible scenario, yet direct hits from neighbouring Arab countries, or even Iran and Turkey, despite being possible, for the time being, remain remote. Yet the possibility of a weaponization of oil seems to be increased and continues to stoke market worries for the supply side of the commodity at an international level. Should Israel’s ground assault on Gaza finally start and especially if it has mass casualties on behalf of Palestinian civilians, tensions are expected to escalate and thus intensify market worries and push safe haven instruments higher, while at the same time may weigh on riskier assets. On the other hand, a possible delay in Israel’s land operation on Gaza, may ease market worries and allow for an improvement in the market sentiment.

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This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.

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