Week Ahead – Eurozone GDP and Yellen testimony to be main market drivers


Raffi Boyadjian, XM Investment Research Desk
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It will be a relatively quiet week for the economic calendar in the next 7 days as many Asian markets will be closed for the Lunar New Year, including China. The Eurozone will see a number of key data releases that will include the first GDP readings for the fourth quarter of 2015. In the US, attention is likely to focus on Janet Yellen’s semi-annual testimony to Congress.

German industrial production data will start the week on Monday, which will precede the Euro wide figures out on Friday. German industrial production has been struggling since August of last year as the emerging markets slowdown hits exports. Output is forecast to rebound by 0.5% month-on-month in December, while Eurozone output is expected to increase by 0.3%. Eurozone GDP readings, also due on Friday, should provide a bigger picture of the Eurozone’s performance in the face of global headwinds and deflationary pressures on the one hand, and ultra-loose monetary policy on the other. Eurozone GDP is forecast to have expanded by 0.3% quarter-on-quarter in the final three months of 2015, matching the pace of the third quarter. The data is unlikely to have a major impact on the ECB, however, which is currently more concerned on seeing off deflationary pressures.

Also to watch next week is the Riksbank’s (Sweden’s central bank) latest monetary policy decision due on Thursday. A year ago, the Riksbank cut its repo rate to negative for the first time in its history to fend off deflation. But a year on, consumer prices are still hovering around 0%. Speculation has been increasing that the bank could cut rates further into negative from -0.35% at present, or possibly announce a currency intervention to devalue the Swedish krona, particularly against the euro.

In the UK, manufacturing and industrial production data are released on Wednesday and are expected to show another dismal month. Manufacturing output is forecast to edge up 0.1% month-on-month in December, while overall industrial production is expected to shrink by 0.2% over the month. Sluggish global demand and a strong pound have held back UK exports and trade figures out on Tuesday are forecast to show only a marginal improvement in the country’s trade balance in December. An excessive current account deficit is currently seen as one of the biggest risks to sterling, along with the threat of ‘Brexit’.

Across the pond, retail sales numbers for January will be the main US data release of the week. Retail sales are forecast to increase by 0.1% over the month, reversing December’s 0.1% decline. The ‘control’ reading, which excludes sales of volatile items, is expected to show a stronger 0.4% rebound, suggesting that the soft patch in consumer spending seen at the end of 2015 may have come to an end at the start of this year. However, the recent batch of mixed data is likely to continue with the preliminary University of Michigan confidence survey due on the same day. The index is forecast to decline to 93 in February from 93.3 previously. The data could get sidelined though as Yellen’s semi-annual testimony to Congress could prove more significant for the dollar. Fed Chair Janet Yellen is due to testify on monetary policy to the House Financial Services Committee and is likely to talk about the Fed’s intentions on interest rate policy. A dovish outlook could add more pressure to the dollar following its recent losses.

Also testifying next week is the Reserve Bank of Australia’s Governor Glenn Stevens, who will appear before the House of Representatives’ Standing Committee on Economics. The Australian dollar has found some support in recent months from a less dovish stance by the central bank, though most analysts still expect further cuts to the cash rate later this year. Stevens’ words will be watched closely for any further guidance on monetary policy. Australian business and consumer confidence surveys out next week will also be eyed for the aussie.