The Week Ahead: Dollar Mixed Awaiting Fed Policy Meeting

World Currencies

The US dollar managed to end the week on a positive note despite North Korea’s missile launch,  a lower than expected retail sales reading on Friday and flat US inflation data on Thursday. Economic data has begun to reflect the impact of Hurricane Harvey and later in the month, the effects of storm Irma will be taken into account. The pound was one of the few currencies that gained against the dollar after the Bank of England (BoE) left rates unchanged on Thursday, but said rate hike could come sooner than expected boosting the currency against the USD. Central banks will remain in the spotlight with the Fed and the Bank of Japan set to publish their September monetary policies in the week of September 18-22.

Probabilities of US Rate Hike in September and December
The US Federal Reserve will publish its rate statement on Wednesday, September 20 at 2:00 pm EDT. The US central bank will also release its updated economic projections and will host a press conference at 2:30 pm with Fed Chair Janet Yellen. Last month the Fed added that “relatively soon” it would start shrinking its massive balance sheet accumulated during its QE program. On the topic of a change to the benchmark, Fed funds rate the CME FedWatch tool rates the probability of a September rate hike at 0 percent, with December a 50 percent chance.

Inflation in Japan remains low despite BoJ Stimulus
The Bank of Japan (BOJ) will publish its monetary policy statement on Wednesday, September 20 at 11:50 pm EDT with a press conference to follow on Thursday, September 21 at 2:30 am EDT. The Japanese central is not expected to make a change to its monetary policy as inflation remains stubbornly low despite unprecedented stimulus by the BOJ. Growth has continued its upward trend but with little help from inflationary pressures, no reduction in stimulus is on the horizon.

Tax reform talk helps Dollar
The EUR/USD lost 0.812 percent in the last five trading days. The single currency is trading at 1.1932 after US tax reform got closer to reality this week. The euro had advanced at the start of the week as more USD weakness was anticipated, but a turnaround in market expectations on a December rate hike and a show of momentum on tax reforms started a dollar rally putting the pair below 1.20. Political uncertainty has been a big factor of USD trading and a Trump administration ready to embrace dialogue with Democrats is seen as a productive development.

Next up will be the September Federal Open Market Committee (FOMC) meeting. The market is expecting the Fed to formally announce the start of the reduction of its balance sheet. Since the move is expected to be gradual the Fed could push the announcement back, especially if there is some uncertainty about a December rate hike but the dollar would suffer if that were the case. The White House has remained tight-lipped about who will be the Fed Chair next year. Yellen’s term ends in February, and with the falling out to favor of Gary Cohn, she could even remain in the job. While Janet Yellen was not the first choice of the Obama administration she got the nod after a scandal took the front-runner Larry Summers out of contention.

Higher interest rates for BoE?
The GBP/USD gained 2.867 percent during the week. The currency pair is trading at 1.3567 near weekly highs of 1.3617. The hawkish policy by the Bank of England (BoE) drove the pound to its highest post Brexit referendum. Even the doves within the central bank have endorsed a rate hike in the near future. Rising inflation and a tighter job market have convinced uber dove Gertjan Vlieghe to back a higher interest rate.

The Office for National Statistics will release UK retail sales on Wednesday, September 20 at 4:30 am EDT. The forecast calls for a rise of 1.1 percent, but taking the volatile items out of the equation will show a 0.1 percent gain. Rising inflation in the UK is a concern because despite a tighter job market wages remain flat putting more pressure on households to cope with higher prices.

Oil Prices Surge
US oil prices surged 4.016 percent in the last five days. The West Texas Intermediate is trading at $49.63 after briefly touching $50 per barrel. Oil prices recorded near two-month highs as demand expectations picked up after the Organization of the Petroleum Exporting Countries (OPEC) released higher demand in 2018. US refineries getting back online also boosted energy prices. Higher demand with limited production due to Hurricanes Harvey and Irma boosted prices.

The International Energy Agency (IEA) also published a report this week that forecasts strong demand keeping the price of Brent above $55 and WTI near $50.

Market events to watch this week:

Monday, September 18
9:30pm AUD Monetary Policy Meeting Minutes

Tuesday, September 19
8:30am USD Building Permits

Wednesday, September 20
4:30am GBP Retail Sales m/m
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Economic Projections
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
2:30pm USD FOMC Press Conference
6:45pm NZD GDP q/q
11:50pm JPY Monetary Policy Statement

Thursday, September 21
Tentative JPY BOJ Policy Rate
2:30am JPY BOJ Press Conference
8:30am USD Unemployment Claims

Friday, September 22
8:30am CAD CPI m/m
8:30am CAD Core Retail Sales m/m
8:30am All Day NZD Parliamentary Elections

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar