FX Week Ahead - First look at US, UK Q4 GDP; UK court to rule on Brexit

GDP and CPI data will dominate the coming week as the UK and the US publish their first estimates of how growth fared in Q4, while the latest inflation numbers out of Australia, New Zealand and Japan will come under the spotlight too. Headlines from Donald Trump’s inauguration speech could have an impact on trading on Monday, and there could also be some volatility from the UK Supreme Court’s ruling on triggering Article 50 on Tuesday.

Eurozone economy likely strong at start of 2017

Monday will get off to a relatively quiet start with only the January flash estimate of consumer confidence in the Eurozone likely to attract any attention. On Tuesday, the flash readings of Markit’s manufacturing and services PMIs will be the main data of the day. The Eurozone economy ended 2016 on a strong note and that momentum looks set to continue at the beginning of 2017. Manufacturing activity is expected to have been largely stable in January according to the flash reading, with the PMI easing marginally by 0.1 to 54.8. The services sector is forecast to be performing more strongly, with the flash services PMI expected to increase from 53.7 to 53.9.

There will be more business surveys on Wednesday with the release of the German Ifo report. The Ifo business climate index is expected to nudge up slightly to 111.2 in January, indicating that business sentiment in the euro area’s largest economy was buoyant at the start of the year. With several crucial elections coming up in Europe later in the year, it will be interesting to see if the current positive sentiment holds.

Australian and New Zealand inflation data to be key in future rate cut decisions

Both Australia and New Zealand will see the release of quarterly inflation figures next week. The Australian CPI numbers are out on Wednesday and the annual rate is expected to accelerate from 1.3% to 1.6% in the final quarter of 2016, which would be the highest in a year. However, the Reserve Bank of Australia will likely pay more attention to the two core measures, which are expected to be mostly steady over the period and below the RBA’s target band of 2-3%.

In New Zealand, the headline rate has been even weaker, though it is expected to rise from 0.2% in the third quarter to 1.2% in the fourth quarter when released on Thursday. Economic growth in New Zealand has outperformed Australia’s during 2016 but persisting low inflation could force the Reserve Bank of New Zealand to cut rates further this year, especially if the New Zealand dollar extends its current 3-week long rally against the greenback. RBNZ Governor Graeme Wheeler could provide more clarity on the rate outlook when he makes a speech on the same day.

Japan ends another year in deflation

Inflation data is also due in Japan on Thursday. The figures could finally show price pressures gathering pace as the core CPI rate, which excludes fresh foods, is forecast to rise from -0.4% year-on-year in November to -0.3% in December. The Bank of Japan’s targeted measure spent much of 2016 stuck around -0.4/0.5% and any improvement would be bound to please the Bank, which is yet to see significant results from its massive monetary stimulus program.

Any improvement however, would likely be down to higher energy prices and a weaker yen, which means there is still a long way to go before the BoJ pulls the plug on its asset purchases. Also to watch out of Japan are trade numbers on Tuesday. Exports are forecast to increase by 1.2% over the month in December, having declined by 0.4% the prior month.

UK Supreme Court to deliver Brexit trigger ruling

The preliminary reading of GDP growth in the fourth quarter of 2016 will be the main data out of the UK next week. But before then, all eyes will be on the Supreme Court’s verdict on whether the British government can trigger Article 50 to formally initiate the Brexit process without the consent of Parliament. The government had lost the case in the High Court in November but appealed the ruling at the Supreme Court. It is thought the government has already made contingency plans as it expects to lose the case, therefore the outcome on Tuesday is unlikely to create much of a reaction in the markets. The pound was boosted this week after the Prime Minister, Theresa May, removed some of the uncertainty surrounding the UK’s Brexit strategy.

There should be more support for the pound from Thursday’s GDP data as it’s expected to show the UK economy grew a healthy 0.5% quarter-on-quarter in the final three months of 2016. Preliminary readings tend to see large revisions but a weaker figure could still add pressure the pound amid all the doubt surrounding the government’s Brexit plans.

US GDP expected to be slower in Q4

The US economic calendar will be one of the busier ones next week, with the highlight being the preliminary GDP figures for the fourth quarter. Starting the week off on Tuesday are existing home sales and the Markit flash manufacturing PMI. The flash reading is expected to show the manufacturing PMI rising slightly to 54.4 in January. The services PMI will follow on Thursday and is also forecast to improve in January. Also to watch on Thursday are new home sales figures and the advance release of the goods trade balance.

On Friday, the latest durable goods orders data is released alongside the GDP figures. Durable goods orders are forecast to rise by 2.6% month-on-month in December, recouping some of the 4.5% drop of the prior month. The big focus will be on the GDP numbers however, to give the first official glimpse into how the economy ended in 2016 as the Fed looks to raise rates more frequently in 2017. The US economy is forecast to have expanded by an annualized rate of 2.2% between October-December, which is slower than the previous quarter’s 3.5% rate. Consumer spending is expected to be once again the main driver of growth, while it will be interesting to see how well exports performed given the dollar’s strong appreciation during the quarter.