WEEKLY WRAP – Forex Market Analysis: Week 43 (Mon 24th to Fri 28th Oct 2016)

Analysis written BY retail traders FOR retail traders

Could the FED have finally run out of excuses ?

Much like my neighbourhood, the week ended with fireworks as US GDP figures printed stronger than expected growth at 2.9%. This was a huge boost to the likelihood of an interest rate rise in December, which along with what appears to be almost full employment around the 4.9%/5% mark, reasonably strong wage growth and strong signs of inflationary pressure it appears that the Federal Reserve have run out of reasons not to press the button again, a year after the last increase. While they do meet next week, and in theory could raise interest rates in November, it would be unlikely. The general feeling is that they will provide strong forward guidance next week for an increase in December with a view to letting the market prepare for a rise and in doing so potentially avoiding any significant economic shock.

There are however still some headwinds to overcome; earlier in the week consumer confidence was soft as were durable goods orders. There is also the ever present US election looming and yesterday’s announcement that the FBI is reopening the Hillary Clinton investigations sent the futures numbers down from a 74% chance of an increase in December down to 68%. So it is by no means a certainty but many analysts believe that if the Federal Reserve do not act now it will soon be too late to head off an inflation target overrun.

In similar news, while everybody continues to wait for the catalyst of doom following the UK voting to leave the EU, preliminary UK GDP figures released on Thursday once again appeared to show significant resilience in the UK economy. Figures for Q3 came in at 0.5% against expectations of 0.3% and once again the economic doomsayers struggled to temper the optimism. The UK appears to have been largely unaffected by the recent vote, although some still feel it is too early to tell as we haven’t actually left the Eurozone yet. There was a further boost towards the end of the week when the Canada/EU free trade deal appeared to gain ground following Belgians political leaders reaching consensus in support of the arrangement. The deal is expected to be signed on Sunday at a summit in Brussels. This gives some indication that the UK may still be able to get access to a revised single market as part of the negotiations. The relationship between Europe and the UK is significantly more complex than Canada but it does give hope to the negotiations.

However, with the good news from the UK economy comes yet the risk of more uncertainty with a rift between Bank of England governor Mark Carney and the current PM, Theresa May. Many feel that Carney could resign in the next couple of weeks, possibly even days, which could introduce yet more uncertainty for the GBP. Carney came under a lot of criticism leading up to the vote for his politicking in favour of staying in the EU, and with things not looking as bleak as predicted, and Theresa May wanting significant control over the forthcoming negotiations, some feel it would make sense for him to step aside.

One thing that doesn’t get much press is the on-going court cases surrounding the whole Brexit issue. Earlier in the week the UK government won the first of several hearings in the Northern Ireland court that stated that the Good Friday agreement contained wording that meant Parliament would need to play a role in instigating article 50. Interestingly the GBP dropped on this news which suggests that winning  such court cases, of which there are several more to come, could prove bearish . This suggests that the GBP still has some way to go before it bottoms out.

There was a trickle of generally good news last week for the Euro with most regional PMIs coming in better than expected, with the most notable being the German IFA business climate coming in at 110.5 against a forecast of 109.6. The most notable release last week was a speech from ECB president Draghi which had very little impact on the markets. Although he stated that he would have preferred current monetary policy not to have been in place for so long, especially such low interest rates, he remained committed to preserving the existing stimulus. The euro still remains a very challenged currency, not just from persistent QE but also from the political turmoil across the Eurozone. There are still some market participants who believe that the single currency is approaching its final stand and that the Italian banking crisis could potentially spell the end for the single currency.

Towards the end of the week we had the usual Japanese data dump, much of which was better than anticipated. Household spending continued to drop but not as much as expected, likewise inflation. The unemployment rate dropped to an impressive 3%, however you cannot forget that while better-than-expected they are all still very negative and Japan still struggles to generate any sign of meeting its inflation targets. With a monetary policy meeting next week these figures are unlikely to encourage any direct action but you can never be 100% sure with the Japanese finance minister.

In terms of the commodity currencies, bank of Canada governor Poloz made the classic central bank governor mistake earlier in the week by miss speaking which sent the Canadian dollar soaring only to give back most of its gains on clarification of what he meant. Initially indicating that rates were likely to remain on hold for the next 18 months he backtracked from this position. Canada remains inextricably linked to oil which fell away towards the end of the week on news that Iraq wants exemption from any OPEC production limitation agreement as they are in the middle of fighting Isis!

The big news for commodity currencies last week was the Australian dollar CPI figure coming in at 0.7% against an expectation of 0.5%. This is positive news for the Aussie dollar and further removes risk of easing, although Fridays PPI coming in at just 0.3% against an expected 0.6% took the shine off of the numbers to some extent.

In other news the VIX index increased sharply last week, starting the week below 13 and peaking at over 17. The VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility compiled using the implied volatilities of a wide range of S&P 500 index options and is often used by market participants as a means of gauging upcoming risk off sentiment. As the US election approaches, and with the new investigations into Clinton, there is a reasonable chance that the VIX could increase further with investors looking for safe haven investments, which could see the Swiss franc and Japanese yen strengthening.

Source: Original content written by Andi Thornton for Clifton FX


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