Fed likely to hike rates on Wednesday?..

Week Commencing Monday 12th December 2016

 

ECB: Bond buying reduced, but extended!

The European Central Bank has said it will extend its bond-buying program until at least December 2017, but it will reduce its purchases by a whopping EUR 20 billion a month.

The initial program was valued at EUR 80 billion per month but had been scheduled to be scaled back by the end of March. In a shock announcement, the bank surprised markets by saying it would only purchase EUR 60 billion per month from April.

The bank did not decide to adjust any other monetary policy instruments and left its benchmark rate of zero unchanged. During the press conference, the bank raised its inflation forecast for next year up to 1.3 percent, which remains well below the 2 percent target but still shows some traction.

Economic growth should continue to push higher, potentially hitting as high as 1.7 percent for 2017.

UK: Far-right fail to make gains in Presidential Election.

UK industrial production fell unexpectedly in October, pointing to a weak start for economic growth in the fourth quarter.

Figures published by the ONS on Wednesday showed that Industrial Production, which accounts for approximately 15 percent of total UK output, fell by 1.3 percent in October compared with September, and was 1.1 percent lower than in October 2015.

The UK economy grew by 0.5 percent in the third quarter and recent surveys have pointed to a similar level of growth in the fourth quarter. The disappointing data has cast some doubt on these forecasts, with many now saying that the economy is starting to feel the chill post-Brexit.

The fall in industrial production was partly caused by one-off factors, in particular the temporary shutdown for maintenance of the Buzzard oilfield in the North Sea. Manufacturing output, which makes up about 70 per cent of industrial production, grew in August and September but fell 0.9 per cent in October.

 

FX Forecast

EUR/USD surged last week to a high of 1.0872 however failed to sustain the break above the 1.0850 level of resistance. Rates have since returned to the 1.0550 region and with bias continuing to the downside (coupled with a heavy US data week), we expect further losses this week.

GBP/USD saw the Sterling bull trend continue, with the rate peaking at 1.2774 last week. Initial bias this week is neutral, especially on the back of last weeks disappointing IP figure. We expect the pair to trade the range, with a potential downside level of support at 1.2307 while 1.28 remains within view.

GBP/EUR continues to head towards the 1.20 mark, with Sterling definitely taking the front foot. The 1.2043 level of EUR resistance remains intact, however should we see some strong geo-political movements around Brexit and we could see markets move very quickly.

 

Economic Calander for the Week

UK Data:

We have a busy week for the UK, with CPI kick starting everything off on Tuesday. We expect to see inflation continue to rise on the back of a weaker Sterling, potentially pushing as far as 1.1 percent in November.

Wednesday we await the Claimant Count and Average Earnings, all of which should come in in line with expectations (5.0K and 2.3 percent respectively). Thursday is the big one with both Retail Sales and the Bank of England expected to move markets. We expect retail sales to disappoint, dropping to 0.2 percent from last months strong 1.9 percent.

The bank should keep monetary policy stable and with no changes, markets will await the press conference and Q&A.

US Data:

We have a very busy week for the US, with Retail Sales kicking off the game on Wednesday. We expect retail sales to decline slightly on the month, from 0.8 percent to 0.4 percent. PPI for November should increase from 0.0 percent to 0.1 percent, which Crude Oil Inventories should drop slightly after last months large -2.389M decline.

The FOMC meeting on Wednesday is the highlight, with the potential for the benchmark FedFunds rate to be increased from 0.5 percent to 0.75 percent. This will create a large currency shock without doubt, so this represents the largest risk to market stability this week.

Finally, we expect Core CPI to increase marginally to 0.2 percent while the Philly Fed should also increase from 7.6 to 9.0.

EU Data:

We have a extremely quiet week for the Euro with CPI on Friday the only release of note. We expect inflation to remain reasonably stable for November at 0.6 percent. As discussed, the Euro is more likely to react to external factors this week, including the FOMC meeting in the US and the Bank of England in the UK.

 

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