Last week the BOC and ECB stayed the course regarding Monetary Policy for their economies. This week, the Fed, BOJ and the BOE get their chance to shine as they meet to discuss next steps. Japan’s LDP will be selecting the successor to Abe as well. Brexit headlines are taking center stage as the light gets dimmer and dimmer on hopes that a trade deal will be agreed upon before the deadline. Coronavirus flare ups in Europe are continuing, stirring fears of a second wave. This week, the UK will limit social gatherings to a maximum of 6 people in order to try and stem the spread of the virus. In addition to the central bank meetings this week, there is a plethora of economic data which could affect the markets.
The Bank of Canada left rates unchanged at 0.25% last week and will continue to buy at least CAD 5 billion per week of government bonds. In addition, BOC Governor Tiff Macklem said to expect extraordinary stimulus for as long as needed to help the nation fully recover from the crisis. The ECB voted along the same lines, leaving rates unchanged at 0%. Although Christine Lagarde said they aren’t targeting the value of the Euro, they are watching its appreciation. They will continue to buy 1.35 trillion Euros worth of debt through June 2021.
This week the US Federal Reserve, the Bank of Japan and the Bank of England will meet to discuss interest rates and stimulus for their respective economies. Federal Reserve Chairman Powell has recently said that rates will be accommodative for years to support the economy. At Jackson Hole, he said that the Fed will let inflation run hot. The answers traders will be looking for from this meeting are: 1) What does “hot” inflation look like? and 2) What else will the Fed do to support a recovery? The Bank of Japan is expected to be a non-event. For years the BOJ has been buys JGBs and ETFs. With some uncertainty around a new PM, the BOJ is likely to leave things on hold, perhaps setting the table for more stimulus in the spring. The Bank of England has a multitude of considerations to work through, while maintaining rates at 0.1%. Uncertainty regarding both Brexit negotiations and the increasing number of coronavirus cases are likely to sway the MPC to extreme dovishness. Some members have even discussed negative rates, however that is not expected for the current meeting.
With a Brexit trade agreement between the UK and Europe looking less and less likely, the Pound has been getting hit. EUR/GBP has moved from .8865 to a high of .9291 this month and talks seemingly have broken down. At the center of the discussion over Brexit is Northern Ireland and EU rules on state subsidies. Boris Johnson wants to change the Withdrawal Agreement; however, EU leaders say they will block any trade deal that breaches the original Withdrawal Agreement. A trade deal needs to be agreed upon quickly in order to give time for both sides to ratify it by the end other the year.
With children heading back to school across Europe, some areas are seeing spikes in the number of new Coronavirus cases. The UK has made it law, effective Monday, that social gatherings must be limited to 6 people! In Europe, new highs in the number of new coronavirus cases in France and Spain, among others, has raised concerns of a second wave spreading across the continent. Markets were also spooked last week as AstraZeneca paused their Phase 3 coronavirus vaccine trials. Watch this week to see if the numbers continue to rise on headline news of a new vaccine.
In addition to the central bank meetings this week, Japan’s LDP will select their successor to Prime Minister Abe. Yoshihide Suga is the favorite to replace Abe. There are talk of snap elections as early as October, which could improve his chances of winning a full 3-year term next year.
In the US, Presidential elections are less than 2 months away. Most polls generally have Joe Biden in the lead by a comfortable amount over current President Donald Trump, however as we saw in 2016, polls could be inaccurate.
There is a plethora of macroeconomic data this week, including the UK Claimant Count, US Retail Sales, and Australia’s Employment Change. Major economic data for the week is as follows:
Monday
- Japan: Liberal Democratic Party Leadership Vote
- New Zealand: Westpac Consumer Confidence (Q3)
- New Zealand: NZ PSI (AUG)
- Japan: Reuters Tankan Index (SEP)
- Europe: Industrial Production (JUL)
Tuesday
- Australia: RBA Meeting Minutes
- Australia: House Price Index (Q2)
- China: Industrial Production (AUG)
- China: Retail Sales (AUG)
- China: Unemployment Rate (AUG)
- UK: Claimant Count Change (AUG)
- Germany: ZEW Economic Sentiment Index (SEP)
- US: NY Empire State Manufacturing Index (SEP)
- US: Industrial Production (AUG)
- US: Manufacturing Production (AUG)
Wednesday
- Japan: Trade Balance (AUG)
- Australia: HIA New Home Sales (AUG)
- UK: Inflation data (AUG)
- Trade Balance (JUL)
- Canada: Inflation Rate (AUG)
- US: Retail Sales (AUG)
- US: Fed Interest Rate Decision
- Crude Inventories
Thursday
- New Zealand: GDP Growth Rate (Q2)
- Australia: Employment Change (AUG)
- Japan: BOJ Interest Rate Decision
- EU: Inflation Rate (AUG)
- UK: BOE Interest Rate Decision
- US: Initial Jobless Claims (week ending Sept 12)
- US: Building Permits (AUG)
- US: Housing Starts (AUG)
- US: Philadelphia Fed Manufacturing Index (SEP)
Friday
- Japan: Inflation Rate (AUG)
- Germany: PPI (AUG)
- Canada Retail Sales (JUL)
- US: Michigan Consumer Sentiment Prel (SEP)
Chart of the Week: Daily EUR/GBP
Source: Tradingview, FOREX.com
As mentioned above, fears of a no trade deal Brexit are filtering through EUR/GBP as the pair has moved from a low of .8865 on September 3rd to a high of .9291 on September 11th. EUR/GBP had been in a rising triangle since early May and made a false breakdown below the triangle on August 25th. The pair almost reached the 161.8% Fibonacci extension from the highs of July 24th to the lows of September 3rd near .9318. In addition, The RSI is in overbought territory, which indicates there may be a short-term pullback. First support is the breakout point of the triangle near .9145, then horizontal support and the rising trendline of the triangle near .9070. First resistance is the 161.8% Fibonacci extension near .9291, then the March 19th highs near .9500.
All the macroeconomic data this week, the central bank meetings, and the on-going coronavirus pandemic has the potential make this a volatile week across all markets. Watch the US Dollar and stocks to help determine direction in other markets.
Have a great weekend and please remember to always wash your hands.
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