Forex Weekly Outlook September 16-20 – All about QE Tapering

The US dollar was on the back foot as US data disappointed in the last week before the critical Fed decision. The FOMC meeting is by far the most important event. In addition, inflation data in the US and UK and US housing data are among the major events. Check out these events and more, on our weekly outlook.

US unemployment claims dropped to 292K, down 31,000 from the prior week associated to a one time statistical error. However despite this glitch, there is a noticeable improvement in the US job market. Nevertheless, the US consumer isn’t keen on spending: consumer confidence dropped and retail sales hardly grew. These followed the path of the disappointing NFP. Can these latest figures impact the Fed? Let’s Start

1. UK inflation data: Tuesday, 8:30. The consumer price index declined in July to 2.8% within market predictions, but remained well above the pay rises for the average British worker, bolstering the BOE’s projections for a 2.0% inflation rate. However there is an ongoing improvement in the labor market which is expected to ease the burden of falling real wages. Inflation is expected to slow down further to 2.7%.
2. German ZEW Economic Sentiment: Tuesday, 9:00. German analyst and investor sentiment soared in August, reaching 42.0 from 36.3 in July, well above the 40.3 expected by analysts. The rise indicates Europe’s largest economy is back on track after suffering a contraction in late 2012 and a weak start to 2013. German investors and analysts sentiment is expected to reach 45.3 this time.
3. US inflation data: Tuesday, 12:30. U.S. consumer prices edged up a seasonally adjusted 0.2% amid higher gasoline, housing, clothing and food prices. Core prices excluding energy and food, also climbed 0.2%. The readings matched market expectations. Economists expect the Federal Reserve will start its tapering plan this month despite concern about low inflation.  CPI is expected to climb 0.2% while core CPI is predicted to rise 0.1%.
4. US Building Permits: Wednesday, 12:30. US building permits edged up 2.7% in July to a 943,000-unit pace, broadly in line with market projections, but increasing at a slower pace due to rising mortgage rates. Still, housing affordability remains high, but less accommodative than a few months ago. The number of permits is expected to climb further to 0.95 million.
5. FOMC decision: Wednesday, statement and economic projections at 18:00, Bernanke’s press conference is begins at 18:30.
   There is a a very high probability that the Fed will announce a reduction in the pace of bond buying on September 18th, and probably by $15 billion to $70 billion. Despite the recent weak employment report, the US is still growing and creating jobs. At this point, the effectiveness of bond buying is limited, and the Fed would prefer that the government pick the baton and provide address the sequester. Bernanke and co. can look at QE and see it as a success story in the housing market, with a clear recovery. However, with house prices rising around 12% YoY (Case Shiller), perhaps the time has come to reduce the level of stimulus (the Fed doesn’t see tapering as tightening) to avoid blowing a bubble. In addition, the Fed might worry about other bubbles in stocks, commodities and emerging markets.
   The notion that the “Septaper” is coming is strengthened by recent comments from Fed officials, that come with “an open mind” to tapering in September. This includes the doves. With the Syrian issue somewhat defused, there are very little chances that the Fed will not taper.
   QE tapering is not fully priced in, and we could see the dollar strengthening afterwards. A lot depends on the guidance to the next tapering steps, and this remains a mystery for now.
6. NZ GDP: Wednesday, 22:45. New Zealand growth slowed in the first quarter to a gain of 0.3% following a 1.5% expansion rate in the previous quarter. Dairy stock ran out sooner than expected, leading to lower milk production and agriculture output declined 4.8%. This was the seventh consecutive quarterly increase and the largest quarterly gain in residential building since September 2002. Economists expected a bigger gain of 0.6% and expect GDP to grow further in the coming months. A gain of 0.2% is expected now. The kiwi is on high ground.
7. US Unemployment Claims: Thursday, 12:30. The number of Americans claiming unemployment benefits plunged last week by 31,000 to a seasonally adjusted 292,000. The drop was mainly because of statistical problems in two states that delayed the processing of applications. The four-week average fell to 321,250, the lowest in six years. However, despite imprecise reading, improvement is felt in the US labor market, with fewer layoffs and better employment conditions. A rise to 323,000 is predicted.
8. US Existing Home Sales: Thursday, 14:00. U.S. home sales edged up in July to their highest level in over three years, reaching 5.36 million units, indicating higher mortgages are having a limited impact on the housing market. Economists expected a smaller reading of 5.15 million units. A decline to 5.27 million units is expected this time.
9. US Philly Fed Manufacturing Index: Thursday, 14:00. Factory activity in the Philadelphia area weakened in August after posting a multi-year high of 19.8 in July. new orders fell as business activity index declined to 9.3 from 19.8 in July and the pace of hiring slowed. Manufacturing in the United States weakened in recent months, due to lower overseas demand. A rise to 10.5 is forecasted.