Week Ahead: ECB And U.S. Inflation To Headline Busy Week

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Central banks, Chinese GDP and U.S. inflation expected to impact market

The USD advanced against most majors, with the Canadian and Australian dollars the outliers as commodity prices continue to rally after the Organization of the Petroleum Exporting Countries (OPEC) production cut deal was announced. Chinese data is once again in the spotlight with the release of its real gross domestic product (GDP) and industrial production on Tuesday, October 18 at 10:00 pm EDT.

The Bank of Canada (BoC) will publish its rate statement and monetary policy report on Wednesday, October 19 at 10:00 am EDT to be followed by a press conference with Governor Stephen Poloz at 11:15 am EDT. The European Central Bank (ECB) is expected to keep interest rates and its quantitative easing program unchanged with analysts forecasting changes to be announced at the December policy meeting. The ECB will release its rate statement on Thursday, October 20 at 7:45 am EDT. ECB President Mario Draghi has the tough task of managing the market's expectations to avoid another communication failure.

The USD was boosted by strong auto sales and producer prices that kept the December rate hike on the table in the eyes of the market. The CME FedWatch tool is showing again near 70 percent probability of a higher fed funds rate. U.S. inflation data due on Tuesday, October 18 at 8:30 am EDT is expected to have gained in September which would continue to validate a rate hike in the final Federal Open Market Committee (FOMC) meeting of the year.

The EUR/USD lost 1.557 percent in the last week. The single currency is trading at 1.0995 after the USD rally has brought the pair under the 1.10 price level. The weekly high was 1.1204 on Sunday as the Asian session was underway and it was all downhill for the EUR. The disappointing trade data out of China released on Wednesday night made the greenback stumble as it combined with weak earnings. Encouraging retail sales and producer prices kept the December rate hike alive even as the University of Michigan published a 11-month low consumer confidence survey.

The USD advanced on Friday as risk appetite returned to markets, with a strong retail sales gain of 0.6 percent and a 0.3 percent advances in producer prices (PPI). The index is a leading indicator of inflation which should keep the Fed on track to hike in December.

The USD/CAD lost 0.943 in the last 5 days. The currency is trading at 1.3154 after the Canadian currency continues to advance alongside oil prices. The prospect of a OPEC and non-OPEC coordinated production cut has kept prices stable even though there are still a lot of details to hammer out. The Bank of Canada (BoC) is not expected to change rates on Wednesday as the central bank is yet to report on the effects on the government's stimulus package. The loonie has depreciated this year which should have given Canadian exports a lift but so far that has not been enough to offset the losses from natural resource exports.

Canadian retail sales and inflation data will be released on Friday, October 21. The federal government has made an effort to cool down the housing market with measures that will kick into effect on October 17, but it's too early to tell if they will accomplish the goal of moderating real estate prices in Vancouver and Toronto.

The price of West Texas gained 1.166 percent in the past 5 days. The WTI is trading at $49.89 after a strong start to the week was derailed by a higher than expected buildup of U.S. crude stocks. Crude inventories rose 4.9 million barrels on the weekly report, but the surprise drawdown of distillates of 3.7 million barrels when only 1.6 million was expected kept most of the downward pressure under control.

The uncertainty surrounding the OPEC deal has kept the price of oil around $50 even as the duration of the agreement as well as the detailed targets are not known. Anticipation will rise ahead of the November OPEC formal meeting in Vienna. Until then, investors will be keeping their eyes peeled for statements for major producers for insights into the direction of energy prices.

Fed speakers continue to keep December Hike Alive

Comments during the week from Fed members Dudley, Rosengren, Harker, Evans and Fisher were all supportive of a rate hike in December. Fed Chair Janet Yellen concentrated more on the outlook for inflation during her speech this week. The topic of her talk was Macroeconomic Research After the Crisis and as such she was more focused on other policy tools that the Fed could use to guide help the U.S. economy keep the growth momentum undisturbed. Chair Yellen was able to make a remark about keeping the economy running hot, while at the same time not discounting a rate hike in December. The minutes from the September FOMC meeting showed a divided Fed membership, and as this week's comments illustrated, there is little separating both factions, which could result in a unanimous rate hike in December. The Fed is expected to remain cautious in 2017 and this is where all those comments about letting the economy run a little hot come in. The central bank is not anticipated to repeat the mistake of 2016 and forecast an overtly optimistic rate hike path that could further erode the market's confidence in policy makers.

Market events to watch this week:

Monday, October 17

1:35 pm EUR ECB President Draghi Speaks
5:10 pm AUD RBA Gov Lowe Speaks
5:45 pm NZD CPI q/q
8:30 pm AUD Monetary Policy Meeting Minutes

Tuesday, October 18

4:30 am GBP CPI y/y
8:30 am CAD Manufacturing Sales m/m
10:00 pm CNY GDP q/y
10:00 pm CNY Industrial Production y/y

Wednesday, October 19

4:30 am GBP Average Earnings Index 3m/y
4:30 am GBP Claimant Count Change
8:30 am USD Building Permits
10:00 am CAD BOC Monetary Policy Report
11:15 am CAD BOC Press Conference
8:30 pm AUD Employment Change

Thursday, October 20

4:30 am GBP Retail Sales m/m
8:30 am USD Philly Fed Manufacturing Index
8:30 am USD Unemployment Claims

Friday, October 21

8:30 am CAD Core CPI m/m
8:30 am CAD Core Retail Sales m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar