Positive US Data Might Support Fed Tightening

Weekly Report - 28/02/2016

US Data Positive, Euro Area Anemic


Positive economic data from the US together with subdued growth from Eurozone saw a brief return of monetary policy divergence across the Atlantic. The Yen which was seen trending stronger since January this year started to ease back as US economic data shows signs of supporting further Fed rate hikes this year.

Weekly Review

Economic data from the US released this week showed a robust start to 2016 and a better than expected end for the Q4 of 2015. Durable goods orders for the month of January increased at the fastest pace in 10 months on the back of increasing demand and lifting hopes that the US manufacturing sector was showing signs of a rebound. Data released by the US commerce department showed that orders for durable goods surged 4.90% while non-defense capital goods orders were up 3.90%.

Later on, the fourth quarter GDP numbers showed an increase of 1.0% in US economic activity, up from the initial estimates of 0.70%. Analysts were expecting to see a dip in the GDP to 0.30%. The GDP data was lifted by a larger inventory build-up and a net trade deficit. Although the Q4 GDP was strong, the fact that business inventories were already stockpiled is being seen as signs of weaker GDP growth in the Q1 of 2016. On Friday, Core PCE data showed an increase of 0.30% on a month over month basis, while rising 1.30% on a year over year basis. Although below the Fed's 2.0% inflation target rate the pickup in the PCE data was seen as positive for the Fed's rate hike cycle.

While economic data was positive for the US Dollar, the Euro and the British Pound continued to suffer losses. Eurozone inflation was flat with some of its big economies showing signs of a slowdown both in GDP and inflation terms. The Euro continued to retreat against the greenback this week as speculation for further ECB easing mounts ahead of its March 10th monetary policy meeting. The GBP remained focused on the Brexit uncertainty and continued to weaken significantly against the US Dollar.


The Week Ahead

A new trading month brings along a lot of economic releases starting with PMI data from the Euro zone, the UK and the US. Most importantly, this week will see the Reserve Bank of Australia's (RBA) monetary policy meeting due on 1st March. Overnight rates are expected to remain unchanged at 2.0%, as the RBA is likely to wait for more economic data before changing policy. Following the RBA's decision, this week will also see the quarterly GDP data from Australia which is expected to rise at a slower pace of 0.50%.

From the Eurozone, German retail sales are due along with flash CPI estimates for the Eurozone. Expectations are for the flash inflation data to have remained unchanged at 0% while the core CPI is expected to dip to 0.90%. The flash estimates come just after last week's Eurozone CPI was recorded at 0.30% and 1.0% on the headline and the core respectively.

In the UK, BoE members are lined up throughout the week and their speeches could bring possible volatility to the British Pound which continues to suffer on the Brexit's uncertainty. By Friday's close, GBPUSD touched fresh lows last seen in 2009, to close at $1.3866, down -3.70% for the week.

US jobs will be the main focus in this week's economic calendar however with the ADP payrolls due on Wednesday followed by Friday's nonfarm payrolls report. While the US unemployment rate is expected to remain unchanged at 4.90%, the monthly number of jobs is forecasted to rise 191k. With last week's economic data such as GDP, durable goods all coming above estimates, a bullish NFP report could keep the momentum going in the US Dollar, which is recovering after falling strong into mid-February.


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