MARKET REVIEW: UNITED STATES OCTOBER 2018 CONSUMER PRICE INDEX
Economic calendar (highest volatility): 12th November – 16th November 2018:
On September 26, the United States (U.S) Federal Open Market Committee (FOMC) raised interest rates, bringing up the benchmark overnight lending rate by another quarter-percentage point to a range of 2.00% to 2.25%, in view of the tone of the regulators suggesting that four U.S Interest Rate hikes are likely to take place this year. This will bring about sustenance in the U.S Dollar's (USD) value and avoidance of a 'sell on fact' currency play, as the formerly vague expectations for four Interest Rate hikes to take place this year has now been largely reaffirmed. Despite the USD falling following the U.S. congressional elections last Tuesday on expectations that the outcome would make further fiscal stimulus measures unlikely, the USD strengthened to close at 96.90 last Friday after the Federal Reserve reaffirmed its hawkish monetary policy stance at its monetary policy meeting on Thursday and stayed on course for a December interest rate hike.
The team here at FintechFX view that trade wars could be a hindrance to the USD's strength moving forward. Though the U.S. is now in the early stages of talks with Japan and the E.U. to lower tariffs and regulatory barriers and has revamped the North American Free Trade Agreement (NAFTA) with Canada and Mexico, the team here at FintechFX views that the new NAFTA deal, called the U.S.-Mexico-Canada Agreement (USMCA), is not a sign that threat of escalating Donald Trump’s tariffs is over. There is still uncertainty about Trump’s steel and aluminum tariffs as the USMCA does not include revisions to such tariffs and Canada and Mexico has stated that it would not sign the USMCA agreement unless the U.S. removes the steel and aluminum tariffs on its two continental neighbors. China and E.U. have recently joined a group of countries asking the World Trade Organization to judge the legality of the U.S. metal tariffs on national security grounds, thus creating another trade war. In a separate filing, the U.S. has also asked the WTO to review those nations that retaliated against its duties. Besides that, there is also nothing in the USMCA that suggests Trump’s tariffs on China would not keep escalating. There continues to be fresh worries about the intensifying U.S.-China trade war following a Bloomberg news report that the U.S. was planning to impose tariffs on all remaining Chinese imports by early December if an agreement between Trump and Chinese President Xi Jinping at the Group of 20 leaders summit in Argentina at the end of November could not be reached. Trump had earlier imposed tariffs of 10% on $200 billion in Chinese imports that kicked in on September 25 and the tariffs are set to rise to 25% on January 1, 2019. Trump has also threatened to imposed the full half billion dollars in Chinese imports if China retaliates, as it already has. Furthermore, the USMCA terms also preclude Canada or Mexico agreeing to a trade deal with China as any such accord with China would allow the U.S. to back out of the agreement with short notice. In fact, the U.S. Trade Representative, Robert Lighthizer, said such terms will serve as a template for future agreements. The outcome of the November 6th U.S. midterm election is unlikely to change the U.S.’s trade war with China as both Democrats and Republicans support a tougher stance on Chinese trade and intellectual property practices. Worries of escalating trade wars with could be a longer-term negative for the USD as currency markets in general, do not favor any forms of trade intervention. Trade wars carry a major risk of escalation that could weaken investment, unsettle financial market and slow global economy.
In regards to this week, the USD and Great Britain Pound (GBP) will probably be one of the most-watched currencies, ahead of the release of U.S.’s inflation rate and on worries over the possibility of the U.K. having to leave EU without securing a trade agreement. The GBP is expected to continue to see high volatility as it remains sensitive to Brexit developments. The team here at FintechFX also view Japan’s Gross Domestic Product (GDP) numbers for the third quarter will be watched closely on Tuesday as incoming data continue to point to weakness in the economy. The country’s GDP is forecasted to have shrunk by 0.3% quarter-on-quarter in the three months to September.
The Japanese Yen (JPY) has been regarded as a safe haven currency. However, the JPY has been losing ground as its economy contracted more than expected at the start of this year. The recent efforts by the U.S. and China to restart a trade dialogue and a dovish Bank of Japan (BoJ) that left its monetary policy unchanged but lowered inflation forecast continue to weigh down on the the safe-haven JPY. The team here at FintechFX views that the JPY could face additional selling pressure next week if the GDP figures, due Wednesday, show a contraction in the third quarter. A higher than expected reading should be taken as bullish for the JPY, while a lower than expected reading should be taken as bearish for the JPY as a worse reading would further delay the timing of the BoJ’s exit from its massive stimulus program.
The Pound Sterling (GBP) has pummeled over the past weeks for fear of a no-deal Brexit after the EU Summit in Brussels on September 16-17 appeared to have made little progress on Brexit, with British Prime Minister Theresa May only suggesting the extension of the transition period after the U.K. leaves the EU. After having an upbeat start to November following reports that Britain had sealed a deal with the EU that would give the U.K.’s financial services companies continued access to the European markets after Brexit, hence adding to the optimism about the prospects of reaching a wider deal with the EU, the GBP sank after a senior member of the Northern Irish Democratic Union Party (DUP), Jeffrey Donaldson, said last Tuesday that Britain may leave the EU without an exit deal. The latest comments indicate that Theresa May may struggle to get a deal through British Parliament as May would need the DUP lawmakers’ support to get any deal passed. Nonetheless, the GBP rose on reports that Britain is preparing for a Brexit agreement by the end of November. Also, the team here at FintechFX views for a "buy on rumour" move to continue to develop pending the Brexit developments as the team is in the opinion that the GBP will rise under all Brexit scenarios so long as a no-deal outcome can be avoided, but the GBP is also at risk of falling if the U.K. leaves the EU in March 2019 without an exit deal. Against the backdrop of fading Brexit optimism, the British Pound was further weighed down by last week’s mixed U.K. economic data that showed a third consecutive quarterly drop in the total business investment. Nonetheless, this week’s economic indicators may not be as positive. The U.K. CPI figures will be watched on Wednesday for evidence that inflationary pressures in the U.K. continue to edge further towards the Bank of England’s target of keeping inflation at 2%. The CPI is expected to is expected to increase to 2.5% in October, from 2.4% in September. Retail sales numbers will follow on Thursday and will be watched to gauge the strength of consumer spending during October, given that consumption accounts for around two thirds of the U.K.’s GDP. Retail sales are expected to have increased by 0.2% month-on-month in October, rebounding only partially from September’s 0.8% contraction, and by 2.7% annually.
Source (Charts): https://www.investing.com
Source (Economic Calendar): https://www.forexfactory.com/calendar.php
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