Week Ahead in FX March 23-27 PMIs and CPIs to Dictate FX Pace

Last week’s turbulent forex market action may extend into this week, but it’ll be regional data that drives much of the volatility this time out, and not central bank statements and jawboning.

Advanced manufacturing data from around the globe will be published with China’s March HSBC flash purchasing managers’ index (PMI) being the most anticipated. Inflation will be another factor at play this week with the United Kingdom and the United States both releasing their consumer-price index (CPI) figures. The U.S. will close out the week with its final gross domestic product (GDP) release for the fourth quarter of 2014.

Monday March 23, China Flash PMI

To worldwide consternation, China’s growth has been slowing down as successive PMI data has shown. In fact, it has barely risen above 50 in the past two years. A reading under 50 indicates contraction, while a higher figure indicates expansion.

Last month, Chinese PMI data hit its highest point in four months with a 50.1 reading versus a forecast of 49.6, but worryingly, exports disappointed with a 20-month low contraction. Investors will be keen to see if the March flash PMI will prove February’s reading wasn’t a fluke but be advised the data could be impacted by China’s Lunar New Year celebrations.

In any event, expect the Chinese government to continue to explore any and all avenues to boost growth. It has already signaled on various occasions that it could miss its 7% growth target this year, and Beijing continues to increase liquidity to boost internal consumption. A slowdown in China will affect its trading partners and the wider world as there will be less consumer demand for Chinese-made products.

Tuesday March 24 French and German Flash PMIs

To no one’s surprise, Germany continues to be the engine revving the European Union’s paltry growth.

Last month France and Germany both missed expectations with their respective PMI releases. While Germany’s tally showed expansion to a reading of 50.9; France disappointed by coming in below expectations at 47.7. On Tuesday, the world will see if German manufacturing holds steady as expected, and France is expected to edge up. Also noteworthy, Germany’s latest Ifo business survey is out on Wednesday, and it too is expected to show a modest improvement.

Meanwhile, the European Central Bank’s (ECB) quantitative easing program is now underway but it’s premature to expect it to bear fruit yet. The real focus insofar as the eurozone is concerned revolves around the quarrelsome debt negotiations Greece is continuing with Germany on Monday. In general, EUR/USD has had a volatile March thanks to the Federal Reserve’s and the ECB’s interventions.

Tuesday March 24 U.K. CPI
Across the English Channel, inflation in the U.K. hasn’t skipped above 1% since the end of 2014. On Tuesday U.K. inflation data will be released and economists expect it hit a new low in February thanks to falling oil prices. Bank of England (BoE) Governor Mark Carney still believes the current level of 0.3% is transitory, and in about two years, he expects it will return to the central bank’s target of 2%. Like the Fed, the BoE has mentioned that it can raise rates with current inflation levels (they are transitory after all), but this scenario appears unlikely at least until after May’s federal election in the U.K.

Tuesday March 24 U.S. CPI
U.S. inflation is expected to remain below 1% in 2015 thanks to a strong USD and the low price of energy. American inflation data is due on Tuesday. The Fed has been more vocal about inflation after the employment component seems to have superficially recovered but it’s a more complicated matter for the central bank. The effects of cheaper imports and the lower cost of energy have increased the deflationary fears as more countries engage in easing monetary policy resulting in lower currencies. The Fed has gone on record to mention that an interest rate hike could occur with current levels of inflation but a lower-than-expected CPI reading could put in question if that rate hike is announced in June or September.

Thursday March 26 U.K.’s Retail Sales
Come Thursday, the U.K.’s latest retail sales data for February will be released. Consumers in the U.K. did not spend enough to avoid a slowdown of 0.3% in January. Year-over-year data continues to be impressive but it’s the month-to-month readings that can hint at growth or a slowdown. British retailers need to find a way to entice consumers to part with their energy-cost savings. This month’s data is expected to have shaken off some of the heavy discount hangover that the holiday season is known for and the hope is for a positive reading of 0.4%.

Friday March 27Final Fourth Quarter U.S. GDP and Janet Yellen Speech

On Friday, the final estimate of fourth-quarter GDP will be made public. U.S. growth in the third quarter was an impressive 5%. Fourth-quarter figures have been lower, but a modest 2.4% growth is expected.

Fed Chair Janet Yellen will speak at the aptly named, “New Normal for Monetary Policy” at the Federal Reserve Bank of San Francisco conference on Friday. After removing the word “patient” from the FOMC’s statement, a lot of questions will be put to her about the timing of the first interest rate hike. The market continues to be divided on a June versus September rate hike. The latest FOMC statement, its economic projections, and subsequent press conference served to stir confusion. Traders will be looking for more details on this “new normal” from the Fed, and the implications on the impending rate hike.

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