– The Reserve Bank of New Zealand rate decision comes on the heels of a dovish RBA that knocked both the Australian and New Zealand Dollars lower; rates markets are suggesting that a dovish turn by the RBNZ is coming as well.
– Topline inflation readings from the UK and the US should show that disinflationary pressures remain strong, keeping firm the prime reason for both the BOE and Fed to keep their policies on hold over the next few months.
– Reports indicate that Congressional Democrats and Republicans are at an impasse over budget negotiations, raising the odds that the US government may shutdown yet again at the end of the week.
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02/13 Wednesday | 01:00 GMT | NZD Reserve Bank of New Zealand Rate Decision
The Reserve Bank of New Zealand rate decision this week comes at an interesting moment, with the New Zealand Dollar having just taken a dip lower in the first week-plus of February. With Reserve Bank of Australia Governor Philip Lowe taking on a more dovish tone, and given how closely tied together the Australian and New Zealand economies have been historically, traders have been pricing in a more dovish RBNZ when policymakers meet this coming week. With jobs growth slowing and below the RBNZ’s medium-term target of +2%, there’s room for 2019 rate hike expectations to loosen. At the start of February, rates markets were pricing in a 2% chance of a 25-bps rate cut this month and an 18% chance of a 25-bps rate cut by June; now, rates markets are pricing in a 9% chance for a February cut and a 42% chance of a cut by June.
Pairs to Watch: AUD/NZD, NZD/JPY, NZD/USD
02/13 Wednesday | 09:30 GMT | GBP Consumer Price Index (JAN)
The sharp decline in energy prices during Q4’18 continues to wreak havoc on inflation readings in developed economies, and the UK is no different. The upcoming January UK CPI report is due to show headline inflation due in at +2.0% from +2.1% (y/y), while the monthly reading is due in a -0.7% from +0.2%. Core CPI is expected to have stayed on hold at +1.9% (y/y).
Putting these data into context, earlier this month the Bank of England’s Monetary Policy Committee made clear that the lack of progress over Brexit coupled with the worldwide disinflation trends will push back the immediacy of any rate move. Rates markets are only pricing in a 34% chance of a rate move in 2019.
02/13 Wednesday | 13:30 GMT | USD Consumer Price Index (JAN)
The upcoming US Consumer Price Index report will show more disinflation, with topline readings faltering around the Federal Reserve’s medium-term target of +2%. Headline CPI is due in at +1.5% from +1.9%, and Core CPI is due in to dip to +2.1% fro +2.2% (y/y). Indeed, the impact of the steep decline in energy prices continues to make its way through the data. The inflation report on Thursday will only underscore the belief that the Fed is due to keep policy on hold for the foreseeable future; Fed funds futures are pricing in an 18% chance of a 25-bps rate cut and a 7% chance of a 25-bps rate hike by December.
Pairs to Watch: DXY Index, EUR/USD, USD/JPY, Gold
02/14 Thursday | 10:00 GMT | EUR Eurozone Gross Domestic Product (4Q P)
The second look at Q4’18 Eurozone GDP may see growth rates continue their decline, with the quarterly rate at a meager +0.1% and the yearly rate down to +1.1% from +1.2% – wholly consistent with the decline expected in the revised Q4’18 German GDP report (+0.8% due from +1.1%). Slowing growth figures should serve to highlight ECB President Mario Draghi’s belief that the outlook for the Eurozone is no longer “broadly neutral” and that risks have moved “to the downside.” Moreover, this should be another piece of evidence that could ultimately give the ECB pause in its efforts to hike rates by “summer 2019.”
Pairs to Watch: EUR/GBP, EUR/JPY, EUR/USD
02/16 Saturday | 05:00 GMT | USD Government Shutdown Deadline if No Budget Agreement
The US federal government shutdown from December 23 to January 25 was the longest in US history, but policymakers in Congress and the White House don’t seem to think that it was that big of a deal. Why? With the US government set to shutdown once again if a budget isn’t reached by the end of the day on Friday, neither Congressional Democrats nor Republicans nor US President Donald Trump appear ready to give in from their entrenched positions staked out during the last round of the fight. Failure to get past the impasse evident at the start of the week would inject volatility anew into financial markets as fresh questions over Q1’18 US GDP would emerge.
Pairs to Watch: DXY Index, EUR/USD, USD/JPY, Gold, S&P 500
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
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