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FX Week Ahead: Central Banks in Focus. ECB Expected to Announce QE Expansion

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The markets will open a new week coming out fresh from the Italian referendum outcome and the Austrian elections. Focus will shift to the central banks this week as the RBA, BoC and the ECB will be meeting. In the UK, the Supreme Court will begin its 4-day hearing on the British government’s appeal on requiring parliamentary approval to trigger Brexit. In the US, it is a slow week with the exception of the ISM’s non-manufacturing PMI.

Japan Q3 GDP to be revised higher

Japan’s third quarter GDP is expected to show an increase to 0.6%, up from the initial estimates of 0.5% on a quarterly basis. The upside revision comes on better than expected capital investment although the pace of recovery is expected to remain fragile. On a year over year basis, Japan’s GDP is tipped to have increased 2.4%, up from 2.2% annualized growth rate registered previously.

Capital expenditure which is a key component of the GDP is also expected to rise to 0.6% from 0.5% previously while public investment is expected to be revised higher from the 0.7% reading previously.

Japan GDP Growth Annualized: 2.2%
Japan GDP Growth Annualized: 2.2%

Bank of Canada expected to hold rates at 0.5%

Bank of Canada is expected to keep interest rates unchanged at 0.5% marking a tenth straight month of interest rates at the current level. Last week’s GDP figures provided a boost to policy makers as the gross domestic product increased 0.3% on a month over month basis. The central bank is expected to keep interest rates steady over the next six months.

Bank of Canada Interest Rates: 0.5%
Bank of Canada Interest Rates: 0.5%

Besides the central bank decision, the Ivey Purchasing manager’s index will be coming out earlier and the data is expected to show a modest increase to 59.9, from 59.7 previously.

RBA Meeting and GDP figures

The Reserve Bank of Australia will be meeting this week and expectations are for the central bank to keep interest rates unchanged at 1.50%. This would mark a fourth consecutive month of keeping the main lending rates unchanged. The central bank is expected to remain in a wait and watch mode until further evidence of inflationary pressures are confirmed.

This week, the Australian third quarter GDP figures will be coming out and the data is expected to show a slower pace of increase. Economists expect to see the GDP rise 0.2%, down from 0.5% previously.

ECB to expand QE by another 6-months

In Europe, the European Central Bank’s meeting will be the big event this week. After the markets initially discounted an announcement of QE tapering, following the recent strength in the US dollar and also the various ECB officials noting that the QE was an integral part of stimulating growth and highlighting the risk of premature exit, the broad consensus now is for the ECB to announce an extension to its QE by at least 6-months.

This decision will eventually push the QE date from March 2017 to September 2017. There is also scope for changes to the QE size which was mentioned by some ECB officials. The central bank’s currently purchases 80 billion euro of bonds under its QE program.

The central bank will also be releasing fresh economic forecasts.

UK’s Supreme Court hearing begins

In the UK, the Supreme Court will begin its 4-day hearing following the appeal by the government on whether it can trigger Brexit without the parliament’s approval. The GBP which has made steady gains following the initial ruling could be seen coming under pressure. The Supreme Court’s decision is expected in January.

US ISM non-manufacturing PMI in focus

It is likely to be a slow week for the U.S as economic data is relatively quiet. On Monday the ISM non-manufacturing PMI data is expected to show an increase to 55.3, after the index fell to 54.8 in October. It would mark a second straight month of increase. In Fed speeches, FOMC Member Dudley will be speaking earlier on followed by Bullard.

ISM Non-manufacturing PMI 54.8 (October 2016)
ISM Non-manufacturing PMI 54.8 (October 2016)

The nonfarm productivity report for the quarter will also be revised this week with forecasts showing a modest increase to 3.2% from 3.1% previously.

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