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This Week's FX, Oil, And Stock Market Volatility To Drive Market

Published 02/14/2016, 01:58 AM
Updated 03/05/2019, 07:15 AM

Yellen Testimonies Make March Rate Hike Unlikely as OPEC Comment Stops Oil Decline

The week from February 5 to 12 was defined by a flight to safe havens. The biggest winners versus the USD were the JPY and the CHF as investors looked to less risky assets. Oil had another rollercoaster of price changes as comments from the International Energy Agency (IEA) put downward pressure until the Organization of the Petroleum Exporting Countries (OPEC) via the United Arab Emirates Energy Minister made a comment about a possible production cut agreement that helped the price of crude bounce on Thursday.

Chinese markets will reopen after the Lunar Holiday and they are expected to catch up to global stock market losses, which could trigger another sell off. The United States and Canada markets will be closed on Monday for holidays. The Fed will release the minutes from its January meeting. Going by Fed Chair Janet Yellen’s testimony the central bank is bullish on the U.S. economy, but concerned about global growth. Retail sales out of the U.S. on February 12 validated the Fed’s view.

There will be a vast number of economic releases this week. Inflation data from the United Kingdom will be released on Tuesday, February 16 at 4:30 am. The FOMC minutes will be published on Wednesday, February 17 at 2:00 pm EST and inflation figures will be available for Canada and the United States on Friday, February 19 at 8:30 am EST.
EUR/USD Chart

United Kingdom Not Out of Deflationary Woods Yet

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British inflation was flat in 2015 despite a record December. Consumer prices at the end of the year rose by 0.2 percent, and while keeping the ghost of deflation at bay, the U.K. is still dangerously close to the edge. The Bank of England will be in no rush to raise rates. Some analysts are putting 2020 down as the earliest a rate hike could happen. More conservative estimates have ruled out 2016 and put the first rate hike from the BoE in the first quarter of 2017.
GBP/USD Daily Chart

Food and energy prices have kept inflation growth in check. This has been a boon for consumers who spent those savings in other goods and services. The inflation target for the BoE is 2 percent, and with wage growth at 2 percent down from 2.4 percent last year, inflationary pressures are subdued.

According to the IEA the price of oil will continue at current levels for the time being. The agency called for a bottoming of prices as they could not see them going to $10, but also due to the glut in supply don’t expect a hasty rebound. The Organization of the Petroleum Exporting Countries (OPEC) on the other hand started to hint at a possible member agreement to curb production. Just the hint boosted energy prices by almost 8 percent, although they will still end the week negative 4.85 percent.

The United Kingdom’s consumer price index (CPI) is forecasted to show 0.3 percent growth in January. The inflation measure is key to the Bank of England. A rise is positive, although the pace needs to be higher if the BoE is to raise rates anytime in 2016.

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Yellen Testimony Reaffirms Fed’s Stance

The Federal Open Market Committee (FOMC) minutes that will be published on Wednesday, February 17 have the potential to create market disruption, but it will be limited given three weeks have passed between January’s FOMC meeting and the release of the notes.

The U.S. Federal Reserve opted not to raise rates in January. The market had forecasted the Fed to stand pat after the first two weeks of the year had drastically changed the macro-economic outlook, with a major sell off of equities in China and the price of oil dropping like a stone affecting commodity currencies. With no press conference after the meeting, the market was unsure on what Fed members thought about the global economy.

Fed Chair Janet Yellen’s two testimonies this week provided an answer to those questions. Chair Yellen continues to believe in the moderate growth of the U.S. Most of the risks in her view come from outside. The fragile state of the global recovery is under threat from lower energy prices and emerging and developed market slowdowns.

After the credit crisis, developed markets stalled, but emerging markets revved up growth. Now the slowdown is part of all markets with few exceptions. The minutes from the December FOMC meeting showed that even though the vote to raise interest rates was unanimous, there were several Fed members that were uncertain. Those fears were proven right, as in a matter of weeks the economic scenario changed for the worse. A second rate hike seems less likely by the day.

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Today the CME’s FedWatch tool has a 100 percent probability of no rate change in the March FOMC meeting and the odds remain high until the end of the year, with December showing 76.4 percent of no change for 2016.

Forex events to watch next week:

Sunday, February 14
6:50pm JPY Prelim GDP q/q
Tentative CNY Trade Balance

Monday, February 15
9:00am EUR ECB President Draghi Speaks
4:45pm NZD Retail Sales q/q
7:30pm AUD Monetary Policy Meeting Minutes
9:00pm NZD Inflation Expectations q/q

Tuesday,February 16
Tentative EUR German Constitutional Court Ruling
4:30am GBP CPI y/y
5:00am EUR German ZEW Economic Sentiment
8:30am CAD Manufacturing Sales m/m

Wednesday, February 17
4:30am GBP Average Earnings Index 3m/y
4:30am GBP Claimant Count Change
8:30am USD Building Permits
8:30am USD PPI m/m
2:00pm USD FOMC Meeting Minutes
4:45pm NZD PPI Input q/q
7:30pm AUD Employment Change

Thursday, February 18
8:30am USD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
11:00am USD Crude Oil Inventories

Friday, February 19
4:30am GBP Retail Sales m/m
8:30am CAD Core CPI m/m
8:30am CAD Core Retail Sales m/m
8:30am USD CPI m/m
8:30am USD Core CPI m/m

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