Major events of the upcoming week
Trading on financial markets continues to take place in an environment of high economic and geopolitical uncertainty. Investors are reacting positively to news of the vaccine, but the COVID-19 virus continues to spread so far. In the past week, some countries in Asia, Europe and certain regions of the United States have increased quarantine measures. It is obvious that in conditions of a partial lockdown, the economy cannot function normally. US labor market data released last week showed an increase in the number of applications for unemployment benefits. The pressure of the pandemic on the labor market and the economy is increasing. A similar situation is observed in Europe.
Vaccination of the population in some countries is a positive signal, but it is already clear that the demand for the vaccine is very high, and pharmaceutical companies will not be able to quickly increase production. Therefore, at least until spring, the epidemiological situation in Europe and the United States will remain difficult. Realizing this, last week the ECB increased its stimulus program. The Fed is next. The FOMC meeting will take place on December 14-15.
In Europe, the situation is exacerbated by the high uncertainty surrounding Brexit. Trade negotiations are close to failure. Already this weekend, the leaders of the EU and the UK can officially announce this. Therefore, trading on Monday in the foreign exchange market may start with a fairly strong gap in the major currency pairs.
US and EU - Release of Preliminary Manufacturing and Services PMI Data for December
Economic activity in the US and EU began to slow down again amid tightening restrictions on the population. The service sector was the first to be hit. In European countries, the PMI of the services sector remains below 50, indicating a contraction in activity in this sector of the economy. At the same time, activity in the manufacturing sector, despite a slight decline, remains above the 50 mark, which indicates the expansion of production. This sector of the economy has gradually adapted to the new economic conditions and continues to recover from the crisis at the beginning of the year.
It is obvious that against the background of the new quarantine measures, the PMI indicators will change their trend from upward to downward. Of greatest interest to the market is the extent of this decline. According to experts, in Germany the PMI of the manufacturing sector will decrease from 57.8 to 56.5 points, and in the EU as a whole from 53.8 to 53.1 points. Most likely, the actual values will be even worse, so on Wednesday the European currency may come under pressure.
The US is also expected to decline after hitting a 5-year high last month. The market's reaction will depend on the scale of the decline. Weekly data on the labor market indicate that the new wave of the pandemic is increasing pressure on the US economy, so the actual values of the indicator may be significantly lower than forecasted.
US – FOMC meeting
Last week, Reuters conducted a poll according to which most economists do not expect the Fed to expand its stimulus program at its December meeting. Experts believe that the regulator will pause until next year to assess the impact on the economy of the previously adopted measures. Also, the Fed may postpone incentives due to uncertainty about the new fiscal stimulus program. Therefore, the final press conference of the FRS and the regulator's long-term forecasts on rates will be of the greatest interest to the market.
Most likely, Jerome Powell will adhere to a softer rhetoric and once again note that interest rates will remain low for a very long time. The announcements about plans to increase the asset buyback program and other stimulus measures in the future will be very important for the market. Any announcements about the expansion of the stimulus program will hit the US dollar very hard. The Fed's neutral rhetoric will allow the US currency to stay at current levels.
UK – Bank of England meeting
The story of Britain's exit from the EU is moving towards its logical conclusion. Over the weekend, the parties are to announce the final decision on the advisability of further trade negotiations. In recent days, there have been significantly fewer optimists in the market, as both sides are already openly declaring that there are significant differences that will be very difficult to overcome. At the same time, neither of the parties wants to make concessions yet. The UK is very likely to leave the EU without a trade agreement, which will deal a severe blow to the country's economy and national currency.
In this regard, the upcoming meeting of the Bank of England is of great interest to traders. But the main problem is that it is very difficult to predict the regulator's reaction to upcoming events. First, at the moment we do not know how the trade negotiations will end up. Until they are formally canceled, there remains a small chance that the parties will be able to reach an agreement. Secondly, earlier the regulator did not clearly state its position regarding plans in case of a hard Brexit scenario. A month ago, the parties were quite optimistic about the outcome of trade negotiations. It is obvious that now the situation has changed dramatically. Difficult economic outlook in the context of Brexit without an agreement may force the Bank of England to go for further easing of monetary policy in order to further support the economy. The market reaction to the unexpected decisions of the regulator can be very strong.