FX Week Ahead: Q2’18 US & Canadian GDP, August Eurozone CPI

Talking Points:

- Trade talks will dominate news headlines in the coming days, be they of the US-China trade war or NAFTA negotiation varieties.

- The US Dollar's drop won't find much reprieve on the calendar this week, as a Fed rate hike is nearly fully priced-in for September.

- The preliminary August Eurozone CPI release on Friday will only have a limited impact on the Euro as attention remains focused on Turkey and potential contagion on European banks.

08/28 Tuesday | 12:30 GMT | USD Advanced Goods Trade Balance (JUL)

Trade balance figures typically go unnoticed most of the time by most market participants, but the data have started to garner more attention in recent months as US President Trump has escalated his trade war rhetoric. With the NAFTA negotiations front-and-center this week with a new US-Mexico trade agreement reached, it seems diligent for traders to expect US President Trump to use the trade balance release as a platform to further escalate his rhetoric on trade – something that has happened the past few releases. We care more about what US President Trump has to say in response to the figures more than the actual data themselves.

Pairs to Watch: EUR/USD, GBP/USD, Gold, DXY Index

08/29 Wednesday | 12:30 GMT | USD Gross Domestic Product (2Q S)

Growth expectations for Q2’18 US GDP have stayed strong, even upon a second visit four weeks after the initial release. According to Bloomberg News, the consensus forecast calls for annualized headline growth due in at +4.0%, a barely discernible difference from +4.1% initially reported. The GDP release poses asymmetrical risk for the US Dollar: if it meets or beats expectations, there is little to be gained by the greenback as Fed funds are already pricing in a 95% chance of a rate hike next month; if it misses expectations, even a small retracement in rate expectations could accentuate the recent dollar pullback.

Pairs to Watch: EUR/USD, GBP/USD, Gold, DXY Index

08/30 Thursday | 12:30 GMT | CAD Gross Domestic Product Annualized (2Q)

The first look at Q2’18 Canadian growth data is expected to show a sharp increase relative to the rate of growth seen in the first quarter of the year. Although June GDP is due in at +2.3% from +2.6% in May (y/y), the annualized reading for Q2’18 is due to show an increase in the rate of growth to +3.1% from +1.3%. Canadian data has been steadily improving for months, and now that inflation is back near +2%, but for the NAFTA negotiations overhanging, there is a strong case to be made that the Bank of Canada would have already raised rates again this year. Currently, rates markets are pricing in a 78% chance of a 25-bps rate hike by the October policy meeting.

Pairs to Watch: CAD/JPY, EUR/CAD, USD/CAD

08/30 Thursday | 12:30 GMT | USD Personal Consumption Expenditure Core (JUL)

According to a Bloomberg News survey, inflationary pressures in the United States continue to build, even as the Federal Reserve has hiked rates twice this year and is on the path to do so twice more. The Fed’s preferred gauge of inflation, the PCE Core, is due in at +0.2% from +0.1% (m/m) and +2.0% from +1.9% (y/y). The expectation for a reaction depends largely on the perception that the Fed will either accelerate or decelerate their current path of projected rate hikes. With inflation coming in right on the nose of the Fed’s medium-term target, it would appear that the odds of a major reaction in FX markets are quite low.

Pairs to Watch: EUR/USD, GBP/USD, Gold, DXY Index

08/31 Friday | 09:00 GMT | EUR Eurozone Consumer Price Index (AUG A)

The initialAugust Eurozone Core CPI is due in at +2.1% (y/y), the same pace of price pressures seen in July. The core reading for August mirrors its July output as well, due in at +1.1% (y/y). Now that the Euro, on a trade-weighted basis, is underwater over the past year (-0.14% between August 24, 2017 and August 24, 2018), it stands to reason that inflation has a natural cushion underneath it for the foreseeable future. Nevertheless, with the ECB’s policy on a preset course – ending QE in December 2018 and raising rates in “summer 2019” – the impact the initial August Eurozone CPI report leaves on markets will be limited.

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