FX Week Ahead – All eyes on Fed; BoE, SNB and Norges Bank meet

After this week’s surprise actions by the ECB, markets will be hoping that central bank meetings over the next seven days won’t stray too far from expectations. Apart from the Fed’s much anticipated FOMC meeting, central bankers from the UK, Switzerland and Norway will also be gathering for their regular policy meetings. In terms of data, inflation and retail sales figures for the UK and the US will be the main highlight.

Japanese business outlook expected to improve in Q4

Starting the week on Monday will be machinery orders out of Japan. Machinery orders, which are considered to be a good indicator for capital expenditure, are forecast to rebound by 1% m/m in October after falling by 3.3% the previous month. On Tuesday, the Bank of Japan will publish its latest quarterly Tankan survey, which measures business expectations across the country. According to Reuters consensus estimates, the outlook for the fourth quarter is expected to improve across all sectors for manufacturing and non-manufacturing, as well as for both small and large firms. However, capital spending intentions in the current fiscal year among large firms are forecast to moderate slightly to rise by 6.1% instead of 6.3% in the prior survey, highlighting the weakness in business investment. GDP growth for Japan was this week revised lower in the third quarter due to a decline in capital expenditure.

Australian employment numbers under the spotlight
Employment data out of Australia will come into focus next week as investors ponder whether the RBA will cut rates again. A surprise negative growth in Australia’s third quarter GDP estimate this week rekindled the prospect of further easing, forcing the RBA to backtrack on its recent more hawkish stance. The latest jobs data is released on Thursday and will likely be monitored closely by the central bank. Also to watch next week is the NAB business confidence survey out on Tuesday.

Eurozone flash PMIs expected to point to steady economic activity

Markit’s flash PMI estimates will be the main data out of the Eurozone next week. The manufacturing PMI is expected to show a small improvement, while the services PMI is forecast to be unchanged in December’s flash reading, suggesting the Eurozone economy continues to recover at a moderate pace. Another closely watched survey due next week is Germany’s ZEW report. The ZEW economic sentiment index is forecast to maintain its post-Brexit recovery by rising to 14.0 in December from 13.8 previously.

Other data for the Eurozone will include industrial production figures on Wednesday and the final inflation estimate on Friday. Eurozone inflation rose to 0.6% y/y in November according to the flash estimate and this is expected to be confirmed in the final reading. The steady move in Eurozone CPI away from negative territory is one of the reasons why the ECB reduced the size of its monthly asset purchases by €20 billion on Thursday. However, despite the receding threat of deflation, underlying prices pressures remain weak (0.7% in the flash reading), indicating the ECB is unlikely to pull the plug on QE anytime soon.

BoE expected to stand pat as inflation ticks higher

It will be a busy week for the UK as, apart from a multitude of data, the Bank of England also holds its scheduled policy meeting. The latest inflation numbers will start off the week on Tuesday, with annual CPI expected to edge up from 0.9% to 1.1% in November. Core inflation is forecast to rise more moderately by 0.1% to 1.3%. The Bank of England faces a tough balancing act as inflationary pressures start to heat up from higher energy and import prices, but the weaker pound has yet to have a significant impact in boosting exports. The Bank will likely hold rates and QE unchanged on Thursday as it assesses the effects of the ongoing developments with Brexit on the economy.

Also important will be Wednesday’s unemployment data and Thursday’s retail sales figures. The unemployment rate in the UK is expected to stay unchanged at 4.8% in the three months to October, while average weekly earnings will also likely hold steady, at 2.3% y/y. Retail sales meanwhile, are expected to pull back in November after surging by 1.9% m/m in October. They are forecast to increase by 0.2% m/m in November. Consumer spending in the UK continues to grow robustly even after the Brexit vote, and has been the main driver of growth for the economy.

Fed set to raise rates for first time in a year

Next week’s highlight will be the FOMC meeting on December 13-14 where the Fed is widely expected to raise its benchmark rate by 25 bps to a range of 0.50-0.75%. The decision is already mostly priced in by the markets but analysts will be looking at how many rate increases FOMC members will be projecting for 2017, as well as for the language used by Fed Chair Janet Yellen who will hold a press conference after the announcement on Wednesday. A more hawkish outlook could spur the US dollar to fresh highs as the post-election rally shows no sign of abating.

US data next week might struggle for attention but there is plenty to keep traders busy in case the Fed event underwhelms. Retail sales figures are due on Wednesday and are forecast to rise by 0.3% m/m in November. This would be down from the 0.8% increase in the previous month but still a healthy rate. Also out the same day are industrial output data. On Thursday, inflation figures are expected to show CPI rising by 1.7% y/y in November. This represents a more than doubling of the rate of 0.8% only back in July, amid strengthening inflationary pressures.

Other US data to look out for are the Philly Fed manufacturing index on Thursday, and building permits and housing starts on Friday.

Swiss National Bank and Norges Bank also hold policy meetings

Finally, it’s worth mentioning that the Swiss National Bank and Norway’s central bank, Norges Bank, will too hold their latest monetary policy meeting next week. The SNB last cut rates in March 2015 and has kept its deposit rate at -0.75% since. The strong Swiss franc, particularly against the euro, continues to pose a problem for Switzerland’s exporters but the Bank will likely keep rates on hold on Thursday. The Norges Bank is also expected to keep rates unchanged, at 0.50%, when it meets on Thursday as its business survey has shown a slight improvement in outlook recently.