Week Ahead in FX: Greece, BoE and US Retail Sales

The release of the U.S. nonfarm payrolls had a muted effect last week as the market had already priced in an improvement over last month’s disappointment. The outcome of the employment component being so close to the expectation dissuaded traders to pick a side as the USD traded mostly sideways versus major pairs. Next week will see a return of the Bank of England to the markets and more importantly policy members comments. Due to election rules civil servants, including central bank employees, were not able to make regular statements as they could have affected the outcome. The Eurogroup will try to solve the Greek dilemma and the U.S. will face the consumer paradox: If confidence is high why are American consumers not spending?. U.S. retail sales and Consumer Sentiment will be released this week.

Monday May 11
All Day EUR Eurogroup Meetings

Eurogroup to Ponder Greece and Celebrate Irish Growth

The Eurogroup meeting this Monday has been actively preempted by comments to lower expectations. Eurogroup Chief Jeroen Dijsselbloem has said that there won’t be a deal on the 11 of May, but that he is happy with the progress made of late. Greek Prime Minister Alexis Tsipras is equally jubilant about the end of negotiations coming to an end soon. With Greece Finance Minister Yanis Varoufakis forced to take a backseat to the negotiations at the very least we can expect a more neutral and optimistic stream of soundbites that when the Economic rebel takes the stage.

The main topics to be covered are two sides of the same coin. Greece of course is on the agenda, but less well known is the report on the progress Ireland has made post bailout. The Eurogroup has released the results from its surveillance mission to Ireland and it shows a stronger economy post austerity. It will be interesting to see if any direct comparisons are made to Greece and their lack of cooperation as Tsipras maintain they will not cross the red lines to avoid affecting pensions and the labor sector.

The Eurogroup meeting and any comments from policy members over the weekend will set the stage for the rest of the week in the forex market. Greece is still an ongoing concern and as another deadline approaches all parties are optimistic about a positive outlook, but little has been done in order to achieve it. The uncertainty driven by the lack of a Greek debt deal or decision on an exit will hang over the market and in an ironic twist will keep the EUR bid until an outcome is reached and the ECB can continue with their QE program unimpeded. The central bank action will put pressure on the EUR once the political uncertainty stops affecting the fixed income market.

7:00am GBP Official Bank Rate

BOE Lifts Veil After Elections to Comment on UK Economy

The Bank of England is back in the markets after the purdah period is over after the United Kingdom’s general elections have passed. Civil servants across the U.K. had to go behind a curtain of silence regarding big decisions or comments that could have an effect on the outcome of the elections. For obvious reasons that prevented the Bank of England members from making comments on the state of the economy and their views going forward. A Conservative majority now in place the BOE is back on the podium.

There have been some developments that have hurt the GBP as economic indicators have come in softer during the election period. The pound has been under pressure as the GDP came in weaker at 0.3%, Manufacturing and Construction have also posted weaker numbers with only the service sector beating expectations. The election results have boosted the GBP as the leadership vacuum has been filled. The central bank will not change the benchmark rate, but the market will welcome the lifting of the veil regarding comments on the economy from policy makers. Later this week the Bank of England will publish the Inflation Report with Governor Mark Carney holding a press conference afterward.

Wednesday May 13

2:00am EUR German Prelim GDP q/q

German GDP to Show Growth on Weak EUR and Cheaper Oil Last Quarter

The German economy surprised the market by beating expectations last time with a 0.7 percent growth on a 0.3 percent forecast last month. The export driven economy managed to benefit from a lower EUR and domestic think tanks have upgraded their growth forecasts. The influential Ifo institute has forecasted a 2.1 percent growth in 2015 a significant rise from the 1.2 percent estimated in the fall of last year. The German economy was able to capitalize on cheaper oil prices and a weaker currency to cut down costs and boost attractiveness of exports. Now that the wind has changed on those two for the time being, but probably not enough to affect April’s data, it will be interesting to see the German economy’s reaction to a changing environment.

The German economy is the strongest engine of growth in the Eurozone and positive growth will be good for the ECB as it can show that the much awaited QE program is bearing fruit. Greek drama has limited the effect of the QE as it has eroded business and consumer confidence. Germany will be dinged by continuing uncertainty but with strong manufacturing results it should keep growing inline with expectations.

5:30am GBP BOE Gov Carney Speaks
GBP BOE Inflation Report
BOE Inflation Report to Leave Forecasts Unchanged Remain Optimistic

The Bank of England was forced to refrain from participating actively in the markets as the U.K. elections were underway. The Conservative win has allowed the central bank to come back into the market and next week the Old lady of Threadneedle Street will have plenty to do. Earlier in the week the monetary policy statement will be released. There is no expectation of a rate change but the comments from BOE members in their meetings with the press will start pouring in to an anxious market. The inflation Report is the highlight of the week for the GBP.

Macro economic conditions have changed since the last Quarterly Inflation Report (QIR). Deflationary pressures from cheaper oil prices have backed down. The forecast from analysts and economist is for no change in the economic expectations of the United Kingdom and with political stability now assured after the elections the message will be optimistic and GBP positive.

8:30am USD Retail Sales
US Retail Sales to Give USD Direction in Busy Week

The United States economy managed to overcome one of its latest setbacks as the nonfarm payrolls in April released today managed to erase the disappointment from last month. The U.S. economy added 223,000 jobs in line with expectations. The unemployment rate remained at 5.4 percent, but there was a further downward revision on the horrendous March numbers to 85,000. The retail sales figures have not outperformed expectations and in some cases failed dramatically to meet them. American consumers have not spent their energy saving and have opted to save or repay debt, which has hurt the retail sector. Going forward as the price of oil rises there will be no savings to boost sales so the numbers released this month could be further extrapolated to set the U.S. retail picture in the second quarter of the year.

U.S. core retail sales are expected at 0.4% excluding auto. Including car sales the forecast is for 0.3%. Last month core retail came in at 0.4% (expected 0.7%) and retail sales was 0.9% (expected 1.1%). The lower forecasts are explained by the lack of consumer spending that is hurting the retail sector. Historically the retail sales data has a deep impact on the USD, specially when the indicator underperforms.

Friday May 15
10:00am USD Prelim UoM Consumer Sentiment

The paradox of the American consumer will continue as the University of Michigan Consumer Sentiment is expected to gain yet again. The disconnect between how good does the average consumer feel versus the amount of money they spend measured by retail sales to be reported two days earlier will continue to grow. The UoM survey is expected at 96.5, an improvement over last months 95.9. This is the preliminary version of the survey to be further revised 14 days later. The data will be released on Friday, May 15 at 10:00 am EST.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza