Central banks and politics in focus

Last week’s flash crash, which impacted many currency crosses, has now largely been reversed, but the exaggerated movement does illustrate the heightened levels of volatility that can be seen, especially during periods of thin underlying volumes. The post-Christmas lull may have made the situation worse, but there’s no escaping the fact that once again, the extreme price action fell in the perennially quiet spell that is seen between US markets winding down and Asian desks coming online.

Monday

The week starts with the Eurozone Retail Sales reading for November. This is forecast to show a year-on-year improvement of 2.9%, up from 1.7% in October and making for the highest print of 2018. With concerns being raised yet again over the European Central Bank’s (ECB) decision to end its asset purchase scheme—some suggest this may have played a role in pushing Italy’s Bank Carige into administration—an upbeat reading would provide some justification for the hawkish bias which is emerging.

The US ISM Non-Manufacturing Purchasing Managers’ Index (PMI) print for December will follow. This is expected to come in at 59.5, slightly below November’s reading of 60.7 and the lowest level since August. It’s worth noting that the November print exceeded expectations although with last week’s employment data, continues to paint an upbeat picture for the US economy. However, political risks are mounting with the Democrats now holding a majority in the House of Representatives, and the US is arguably on the back foot when it comes to trade negotiations with China. These are expected to get underway today, with quick progress having the scope to fuel risk appetite and suppress Dollar demand.

Tuesday

German Industrial Production readings for November are scheduled for release on Tuesday. This print is forecast to return to positive territory with 0.5% expansion, after last month’s 0.5% contraction. Given the wider economic landscape, this number in isolation is unlikely to carry much influence over the short-term fortunes of the common currency, unless there’s a significant shortfall. Again, this would likely be seen as highlighting the worsening global trade position.

Wednesday

The latest Federal Open Market Committee (FOMC) meeting minutes will be published today. Although the Fed has been quite explicit in its guidance for 2019 already, any fresh clues over the timing could provide direction for the Dollar. The market may be taking a more dovish view of the outlook too, amidst growing concerns of the US economy sliding towards recession. Therefore, strong signals over rate hikes in the early part of the year could bolster the US Dollar.

Thursday

The Chinese Consumer Price Index (CPI) reading for December is due for publication on Thursday. The monthly figure is expected to show a return to growth of 0.3% after November’s dip into negative territory, although there has been no shortage of cautionary tales emerging from the world’s second-largest economy—most notably Apple’s warning over sluggish iPhone sales. An upbeat print will have the potential to fuel risk appetite, driving the Dollar broadly lower against other currencies. The annualised figure will also be released and is predicted to hold steady at 2.2%, down from late summer highs of around 2.5%.

The French central bank Governor speaks on economic prospects for Europe in 2019, while The President of the Chicago Federal Reserve is scheduled to speak on US economic conditions and monetary policy.

Friday

Australian Retail Sales for November will print on Friday, with this number forecast to come in at 0.8%, up from 0.3% in October. This would make for the highest print in a year and is something which would have the potential to rattle Reserve Bank of Australia (RBA) policymakers. The Australian Dollar found support at the end of last week from emerging risk appetite; progress in China/US trade talks could be instrumental here too. However, with the RBA seemingly struggling to convince many in the market that its next move for interest rates will be higher, resurgent consumer demand may help convey the message and in turn further bolster the AUD exchange rate.

The US Consumer Price Index for December rounds out the week in terms of high-profile macroeconomic data. This is expected to show as holding flat at 2.2%—still above target, but well down from the 2.9% readings seen in the summer. Anything below this level would have the potential to fuel concerns that the Federal Reserve has been too aggressive with its stance over monetary policy, not only leaving the door open to some selling of the Dollar but also leaving Fed Chief Jerome Powell open to yet more criticism from Donald Trump.

The Kansas City Fed President will speak on the economy and monetary policy outlook today.