FX Week Ahead - Eurozone flash PMIs and US-UK Q3 GDP in focus

Next week will be important from the point of view of economic data, as Eurozone business surveys for October will come out, together with third quarter growth numbers for the US and the UK, and finally inflation data out of Australia and Japan.

Eurozone activity expected to be steady in October

Monday will start with the Markit flash PMIs for key Eurozone countries as well as for the euro area as a whole. According to Reuters poll, a slight improvement is expected in the services and composite indices in October to 52.5 and 52.8 respectively. But the manufacturing PMI is forecast to remain unchanged at 52.6. The German Ifo survey due out on Tuesday is expected to show a slight improvement in the current conditions index but when including future expectations, the business climate index is forecast to hold steady in October. More business surveys will follow on Friday with the Eurozone’s economic sentiment index, while the week will wind down with preliminary German inflation numbers.

Also to watch for the Eurozone next week will be a speech by ECB President Mario Draghi on Tuesday. Draghi will speak on “Stability, Equality and Monetary Policy”, but given the press conference that followed the ECB October 20 meeting, he may just repeat some of those comments.

US Q3 GDP to show rebound after weak first half

The week’s most important statistic will be the release of third quarter growth out of the United States on Friday. But before then, durable goods orders, housing data and business surveys should keep traders occupied. The Markit flash manufacturing PMI is due on Monday, followed by the consumer confidence index on Tuesday. The Conference Board’s consumer confidence index unexpectedly surged to a nine-year high of 104.1 in September but is expected to ease to 102 in October. The last of the week’s US survey data will come on Friday with the final reading the University of Michigan consumer confidence index.

The September durable goods orders are also released on Thursday. Durable goods orders are expected to increase by just 0.1% over the month – the same rate as in August. US housing data next week will include new home sales on Wednesday and pending home sales on Thursday.

The main focus though will of course be the preliminary third quarter GDP data. Economists are expecting a substantial rebound from the second quarter’s 1.4% annualized rate to a relatively strong 2.5% in the third quarter. It is important for the US economy to perform well during the second half of the year given the weakness that occurred during the first half. In addition, strong growth and good prospects for future growth, are essential prerequisites so that the Fed is in position raise rates come December.

First post-Brexit GDP data for the UK

The United Kingdom will also announce its preliminary growth estimate for the third quarter, due on Thursday. The data will be of more importance than usual as they are for the three months immediately following the Brexit referendum on June 23. The impact of Brexit will not be felt much however, as strong consumer spending and a weaker pound have helped the UK economy overcome any Brexit jitters. Growth is expected to slow to 0.3% quarter-on-quarter in the three months to September from the previous quarter’s 0.7% rate. A weaker reading would likely weigh on sterling but a surprise strong number would put into question the need for further easing by the Bank of England.

Australian and Japanese inflation numbers to be eyed

Inflation data out of Australia will be closely watched on Wednesday as it could determine whether the Reserve Bank of Australia decides to cut rates anytime soon. CPI in the third quarter is expected to pick up slightly to 0.5% q/q from 0.4% previously, and to 1.1% year-on-year from 1.0% in the second quarter. In Australia, inflation announcements tend to move the market more than other countries, as they take place only once a quarter. Given the disappointing employment numbers released this week, the addition of soft inflation figures could begin to sway the RBA for additional rate cuts and would likely drive the Australian dollar lower. The aussie has been fairly bullish recently as rate cut expectations have been fading due to the RBA sounding less dovish of late.

In Japan, key inflation figures will be released on Friday. Japan was in deflation of about -0.5% y/y during August as per the core CPI measure. It is expected to remain unchanged in September, thus increasing speculation that the Bank of Japan will once again push back the timing of when it expects to hit its 2% target. Accompanying the inflation numbers will be household spending and unemployment data. Household spending is forecast to rise by 0.6% month-on-month in September, reversing some of the 3.7% decline of the prior month. The unemployment rate meanwhile is expected to hold steady at 3.1% in September. Also to watch for Japan are the latest trade figures due on Monday.