The ECB is expected to deliver its first back-to-back rate cut on Thursday. CPI data incoming in Canada, Japan, New Zealand and UK. China GDP and US retail sales also high on investors’ radar.
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Welcome to another episode of Global Market Insights, brought to you by XM.com, where we provide meaningful and informative content about the events that affect market trends and shape global markets. Hello, and welcome to the Weekly Forex Outlook at XM.com. Next week, the ECB will meet, and the question is, will it deliver its first back-to-back rate cut on Thursday? We'll also get CPI data out of the UK, Canada, Japan, and New Zealand, as well as China GDP figures, and U.S. retail sales data, which investors will be keen to watch out for. I'm Maria Pashard-Vase, and joining me is late investment analyst Rafi Boyajian. So Rafi, let's start with the ECB, which cut interest rates by 25 basis points at its last meeting in September. What data has come out since then? What do you think the ECB will do this time when it meets on Thursday? And how might the euro be affected? Well, Maria, you've kind of hit it on the nail there in terms of what data has come out since then, because we had actually a pretty bad set of PMI numbers, particularly for Germany, which basically we saw recession risk resurfacing for Germany, and to an extent to the whole of the euro area as well. And we also had inflation finally dropping below 2%, it came at 1.8% in the September world/reading, we're going to get that final reading next week as well. And so really, we were hearing at the last meeting from Christine Lagard, and of course, other officials that spoke soon after the meeting there, probably next time we're going to get a rate cut, it's going to be at the December meeting where we're going to have more data so they can move cautiously. But following the poor set of PMI and CPI numbers, we've seen expectations basically surge for 25% rate cut in October. And we've had pretty strong signals as well from Lagard and other officials that it would be appropriate to cut rates again. Now there have been some reports that this isn't set in stone that they're still going to be discussing whether or not a back-to-back rate cut is required, but probably they will cut given the downside risks to growth. So whilst there is some room for, say, surprise, no change in rates on Thursday, I think on the whole, most market participants are expecting the ECB to cut again. And of course, they're probably also going to flag further rate cuts down the line. But that would probably be slightly negative for the euro, because it's mostly priced in right now. So unless there's anything from Lagard's press conference to suggest that maybe they're not as downbeat about the gross picture or maybe they might have to pause at some point in the future, I think the euro on the whole will probably be driven going forward by what's happening to the US dollar and what the Fed is expected to do because with the ECB it's a little bit more clear cut in terms of their rate pass and that's pretty much priced into the markets already. Turning now to upcoming CPI inflation data, we'll get numbers out of the UK on Wednesday. Can you tell us how the UK economy has been doing and whether you think we will continue to see progress in inflation and what reaction might we see in the pound? Well the UK economy actually did pretty well in the first half then, it seems to have stagnated again a little bit. The most recent monthly GDP prints did come in a little bit better, which is encouraging. But the question with CPI is mainly about how much of an impact will the rise in the energy price cap have on CPI because that price cap I think comes into effect in October. So the October CPI data and probably November as well will be very important for the Bank of England to see how much of a spike in CPI there's going to be. For September, which we're going to get and on Wednesday as you said, I think inflation will probably hold around a little bit above 2%, maybe around 2%, as it's been there for the past, for the previous two reports. Now a day early we're also going to get some wage growth numbers that's going to be important to and then the following day on Thursday there's going to be retail sales numbers. Again it's important to see how consumption is holding up in the UK. So with the pound, I think we did have recently some rubbish remarks from Governor Bailey, but after that reaction we saw the pound falling and it's kind of been consolidating. And also we're probably going to get some choppiness next week, I think the pound will probably continue to consolidate until we get the next CPI report, one after this where we get to see just how much of an effect the UK energy prices had on headline inflation because then that would give us a better picture as to whether we should start to worry again about inflation in the UK or whether if we don't see as much of a pick-up in inflation then I think as Governor Bailey's put signals they might have to cut rates more aggressively than they had previously messaged to the markets. We'll also get CPI data out of Canada. Thank you for listening to another episode of Global Market in China. What's your trade or watch out for there? Well, I think the CPI data will both for Canada and for example, we've got the October policy meeting coming up towards the end of October by the Bank of Canada and then with New Zealand there's a question of how much they're going to cut in the November meeting. So with the Bank of Canada, they've been rather davish lately, we've seen inflation fall quite substantially in Canada, so if the CPI numbers maintain that negative falling trend, then I think the Bank of Canada will probably cut by 50 basis points at their next meeting. However, maybe just something to for traders to consider is the fact that the loony is already kind of struggling against the US dollars. It's looking a little bit oversold, so in case we were to get an upside surprise in these CPI numbers that could bring about a bit of a positive correction for the Canadian currency, but on the whole, I think BOC is headed towards the 50 basis point rate cut in October and the same for the RBNs that they will probably cut by 50 basis points again. So for New Zealand, we should see inflation falling within the RBNs as 1 to 3% target band. The CPI will probably fall to 2.3%. And that could potentially even open the door to a 75 basis point rate cut for the RBNs that in November, because the thing to consider with the RBNs then is that after November they don't get to meet until February next year, so that's quite a long time, a lot can happen between during that period. So the RBNs that might not want to wait that long to cut again, so they might basically do a bit of front loading, so that's a potential risk for the Kiwi. Now for Japan it's totally different picture, the BOG of course is on a rate hiking path, but more recently they've been signaling that they're not in a hurry to hike again, they're probably going to stay on hold for the rest of the year. I don't think we're going to get anything from Friday's CPI numbers out of Japan that's really going to change the near term picture in terms of inflation risks, moving upwards again or anything like that, so I don't think the yen, there's going to be huge reaction in terms of the upcoming data. I think it's a bit of a wait and see moment now when it comes to the BOG and the yen. And finally, regarding other important data out next week, on Thursday we'll get US retail sales for September, just before all the corporate earnings data is released. And in China, Q3 GDP numbers will be published on Friday, what reaction can we expect in the markets? Well, Maria, it's going to be somewhat over quite a week in terms of both Fed speak and US data, but we sort of have the US retail sales as a highlight. Now of course it's important for US consumers to keep on spending, if you're not going to see a sharp slowdown in US growth, so I think dollar traders will definitely be watching that data, but on the whole we are in this push and pull situation if you like in terms of whether or not the Fed is going to cut rates in November. Now we've moved from say 50 versus 25 to 25 versus no cut, and the reason is because recently we've been getting a lot of strong data out of the US, I think the Fed will cut because I think that's pretty much the message we've been getting from policy makers, but I think we're probably going to see a bit of need your reaction to any surprises to the data. Now, for Wall Street, you mentioned earnings, so that might be a bigger focus for equity traders than the US data, because I don't think there's any game-changing data on the economy. Now when it comes to China, I think for the stock market this will probably also be kind of important. China is going to be publishing third quarter GDP numbers on Friday, and of course we've got all these worries about Chinese economy slowing down, the government not doing enough to stimulate the economy, but of course in the last couple of weeks we've been getting plenty of announcements on various stimulus measures. We might actually get more announcements over the weekend on Saturday and then first thing on Monday as well, so if we get any fresh measures on how to boost growth, this might actually, you know, markets might actually shrug off the GDP numbers, particularly if there's any disappointment in the data, because of course what's important now is the fact that Chinese government is stepping up in terms of trying to revive the struggling economy, and so if that is indeed the case, then I think equity markets will continue to rally. Raffi, thanks so much. This was the Weekly Forex Outlook here at XM.com. Thank you for listening to another episode of Global Market Insights brought to you by XM.com. For more in-depth technical and fundamental analysis, be sure to visit www.xm.com/research. (upbeat music)
