FX Week Ahead: FOMC Set to Hike the Fed Funds Target Rate

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The U.S. Federal Reserve meeting on Wednesday is likely to overshadow all other economic events over the week. After nearly a month of the markets rallying in anticipation of a Fed rate hike, the markets are geared up for a second rate hike in almost a year after the initial 25 basis points increase. Across the Atlantic, the Bank of England’s meeting is likely to be a non-event in comparison, but the week still holds some important reports from the UK. Here’s the weekly guide to the forex markets this week.

U.S: FOMC meeting, retail sales, and inflation

The Federal Reserve’s meeting on Wednesday will see the central bank hike interest rates by 25 basis points, which will push the Fed funds target rate to 0.75%. With the rate hike priced in by the markets, the focus will turn to the forward guidance as the Fed will also be releasing the staff economic projections. The markets will be curious to know the pace of rate hikes over the next year which could be a key indicator for further strength in the U.S. dollar.

However, the strong rally since the November 8th election also highlights the risk of a downside reaction on the dollar which stands firmly above the 100.00 psychological level.

Besides the Fed’s meeting, economic reports from the U.S. this week will include the retail sales figures due out on Wednesday before the FOMC meeting as well as the producer price index data. Retail sales excluding autos are tipped to moderate, rising only 0.4% on a month over month basis in November. This comes after a 0.8% increase in October (which followed a 1.0% increase in September) while the retail sales control group is expected to rise 0.4%, down from 0.8% previously.

US Retail sales 0.8%, October 2016
US Retail sales 0.8%, October 2016

U.S. producer prices which remained flat on the headline in October is expected to rise a modest 0.1% while core PPI excluding food and energy is expected to rise 1.3% on a year over year basis.

UK: Bank of England expected to hold rates steady

The Bank of England’s monetary policy meeting this week is quite likely to be a non-event and perhaps overshadowed by the Fed’s. As the central bank meets on Thursday, expectations call for the BoE to keep interest rates unchanged a 0.25% while also maintaining its asset purchases.

Ahead of the BoE’s meeting this week, policymakers will be assessing the monthly inflation figures due to come out on Tuesday.

Headline inflation is expected to rise 1.1% after rising 0.9% in October. Core CPI is also expected to rise 1.3%, up from 1.2% previously. On Wednesday, the monthly jobs report is expected to show that the UK’s unemployment rate was steady at 48%, while the average earnings index is expect to rise 2.3%, rising at the same pace as the previous month.

UK Inflation Rate: 0.9%, October 2016
UK Inflation Rate: 0.9%, October 2016

Earlier in the day on Thursday, the monthly retail sales figures will be released. Economists expect to see retail sales rise at a slower pace of 0.2% on a month over month basis which will signal a slowdown compared to October’s 1.9% increase. Excluding fuel, retail sales is expected rise 0.2%, rising at the same pace as the month before. On a year over year basis, UK’s retail sales are expected to rise 6.1%, down from 7.6% previously.

Swiss national bank expected to keep rates unchanged

The Swiss national bank will be meeting on Thursday for its quarterly monetary policy meeting. The 3-month LIBOR rate is expected to remain unchanged at -0.75%. The SNB will be releasing fresh economic forecasts during this meeting as well. No major announcements are expected from the SNB which is likely to maintain its grip on the Swiss franc.

In the eurozone, following last week’s ECB meeting, the week ahead is quite with only the flash manufacturing and services PMI figures coming out as well as final inflation figures from the eurozone. The single currency for its part will be taking cues from the U.S. dollar as monetary policy divergence is likely to keep the EURUSD volatile.

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