Rate Decisions Ahead for FX

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Rate Decisions Ahead for FX

Daily FX Market Roundup 12.18.19

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

In the next 24 hours, the economic calendar is jam packed with market moving data but whether or not currencies respond to these events remain to be seen. There will be 2 monetary policy announcements – one in Japan and another in the U.K. Employment numbers are also scheduled for release from Australia followed by retail sales data from the UK. US existing home sales and Philadelphia Fed index are also on the calendar but these reports should not have much impact on the greenback. Instead, the only currencies that could see big moves are AUD, GBP and NZD. On Wednesday, the US dollar traded higher against all of the major currencies except for the comm dollars. The Canadian dollar was the best performer thanks to stronger than expected CPI growth. USD/CAD dropped to its lowest level since October and the strength of today’s move sigals further losses.

Unfortunately stronger Eurozone and UK data failed to lift euro and sterling. German businesses grew more confident in the month of December according to the IFO, but EUR/USD rejected the 200-day SMA at 1.1150 to trade back towards 1.11. Sterling traders shrugged off stronger CPI and took GBP/USD lower for the second day in a row. While Boris Johnson’s victory brings some relief for the Bank of England, his adherence to the withdrawal deal and willingness to leave the European Union with a deal or not means the uncertainty remains. In the last chapter of the Brexit drama, the EU warned that they could block Johnson’s Brexit deal over the rights of EU citizens. There are “remaining problems” according to Guy Verhofstadt, their Brexit coordinator and “Everyone presumes the European parliament will give automatically its consent to the withdrawal agreement. Not if the remaining problems with the citizens’ rights are not solved first,” Mr Verhofstadt said on Wednesday. “Citizens can never become the victims of Brexit.”

Meanwhile no changes are expected from the Bank of England on Thursday but the central bank could hint of 2020 easing. Inflation is very low, having fallen to 1.5% in October and holding there in November. This is well short of their 2% target. Since the last policy meeting, manufacturing, services and construction sector activity weakened while wage growth slowed. Although it can be argued that these reports do not incorporate the possible return of business investment and pickup in activity after the UK election, the fact that we’re talking about no deal again means the BoE cannot be complacent because the risks have not abated. Easing is most likely on the horizon and if the central bank emphasizes low inflation or their slow recovery in their policy statement, GBP/USD could extend its slide below 1.30.

No changes are expected from the Bank of Japan either but unlike the BoE, their next move is expected to be a reduction in stimulus. Japanese policymakers have made it clear that the bar is high for additional easing and the stable yen combined with equity market strength has many economists looking for stronger growth next year. Tightening is still far away – 2021 is more likely than 2020 but further stimulus is not on the horizon.

The Australian dollar will also be in focus with Australian labor market numbers due for release – this is one of the most market moving economic reports. According to the PMIs, job growth is slowing and if the labor market numbers confirm that, they would reinforce the Reserve Bank’s dovish bias. AUD/USD trended lower for the fourth day in a row and according to the RBA minutes released this week, there’s still scope for easing next year. The New Zealand dollar traded sharply higher on the back of stronger GDP numbers. However the positive report was offset slightly by weaker than expected trade data.

Kathy Lien
Managing Director

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