Last week the U.S. CPI data came below expectations suggesting the Fed might slow down the pace of tightening, but this doesn't mean the fight against inflation is over. There has to be a clear sign of inflation cooling down. The market now expects a 50bps rate hike in December.
SNB's Jordan said he is "prepared to take all measures" including selling FX, which he also mentioned in the past, but this time his tone was more convincing causing a market reaction that strengthened CHF on Friday.
This week we have a light calendar on Monday, followed by the monetary policy meeting minutes Tuesday in Australia and the U.S. empire state manufacturing index, PPI m/m and core PPI m/m. Tuesday will also be busy with the G20 meetings.
Wednesday will reveal the wage price index q/q for Australia, the inflation data for the U.K. and Canada; and the core retail sales m/m and retail sales m/m for the U.S. In the U.K. we'll also have the monetary policy report hearings and BOE Gov Bailey is expected to speak.
Thursday will bring the employment change and unemployment rate for Australia, as well as the U.S. housing starts, followed by U.S. existing home sales data on Friday.
A few Fed members are expected to deliver their remarks over the week including Brainard who's expected to speak on the economic outlook at a Bloomberg news event, in Washington DC.
SNB's Jordan will speak again Monday at the "Club of 100" and Lagarde will have an address Friday at the European Banking Congress in Frankfurt. Neither of them are expected to say anything new as these types of events are not supposed to create volatility in the market, but they're worth keeping an eye on.
At the last RBA meeting, the bank hiked the cash rate by 25bps while the market expected 50bps, so it will be interesting to see if we will get clarifications on the matter and whether to look for an additional 25bps rate hike until the end of the year. The Governor said policy changes are not on a pre-set path and they will be data dependent as the fight against inflation is far from over. The cash rate is now at 2.85% and the Governor stressed that even though the Board decided to hike by a lower magnitude now, it could return to higher increments if necessary.
The G20 Meetings on Tuesday and Wednesday will likely focus on geopolitics and could include a meeting between Biden and Xi. Russia will send Foreign Minister Lavrov according to Al Jazeera.
Retail sales in the U.S. might see some increase due to the early holiday shopping season even if over the previous period there was some slowing in consumer spending. Gas prices started to grow back last month which means sales at gasoline stations could boost the overall figures. Wells Fargo forecasts a 1% growth in retail sales in October, meaning a 0.5% real gain. Industrial production should also reflect a slight improvement of 0.2%, fuelled by consumer demand for durable goods and high capacity utilization.
The U.K. inflation data will be very important to watch this week. The market expects CPI y/y to rise from 10.1% to 10.8% while the core CPI y/y to drop from 6.5% to 6.4%. The economic situation in the U.K. doesn't look promising. Last week's GDP data was above expectations, but still in negative territory which suggests the beginning of a five-quarter recession. The housing market is also under pressure and the labour market conditions are not showing signs of improvement.
The employment data for Australia is expected to show some easing this week, while the Japanese CPI is expected to run hot, the consensus being for a rise from 3% to 3.5%. Many analysts believe that inflation hasn't peaked in Japan so it will be interesting to see what happens next. BoJ Governor Kuroda's tone was still very dovish so it's less likely that a significant change in policy will happen before the end of the year.
The housing market in the U.S. was negatively impacted over the last few months by increasing mortgage rates. Buyer demand was clearly affected as well, and it is not expected to show signs of improvement for some time. Existing home sales have declined for the past eight months leading to September, and Wells Fargo expects a further decline in October, bringing the overall annual pace to 4.31 million-unit from 4.71 in September.
USD/CAD expectation
On the H1 chart the pair closed the week near the 1.3235 level of support. A correction is expected until the 1.3385 level of resistance or even 1.3480, the next resistance level after that. From there the downtrend should resume targeting 1.3165 if nothing significant happens in the market.
A risk for this trade is the CPI data for the Canadian economy. The core CPI m\m is expected to print above expectations and the y/y data to drop from 6.9% to 6.4%.
GBP/CHF expectations
On Friday the CHF strengthened due to Jordan's remarks and it is expected to do so for the week ahead. The U.K. economy is not likely to show improvement, so from a fundamental perspective the pair looks good for selling opportunities.
On the H1 chart the pair found support at 1.1135. A correction is expected until the 1.1260 level of resistance and if that level holds, the next target could be 1.1080. However, on the H4 chart a bullish divergence seems to be forming on MACD which, if aligned with the fundamentals, might suggest a bigger correction, maybe to 1.1340.
All eyes will be on the CPI data for the U.K. and Governor Bailey's remarks which represent a risk for this trade.
This article was written by Gina Constantin.