Fed and the BoC to rattle the markets

Maybe the most characteristic move of the market for the past few days was the drop of US stockmarkets as the market increasingly seems to be pricing in a more aggressive, hawkish stance from the Fed. The market’s questions are to be answered next week as the Fed is to release its interest rate decision on Wednesday the 26th of January. On the monetary front we also note, the same day, the release of BoC’s interest rate decision which will be also of particular interest. As for financial releases, we note on Monday the release of the preliminary PMI readings for January from Australia, Japan, France, Germany, the Eurozone, UK and the US. On Tuesday the 25th we note the release of the US consumer confidence indicator for January as well as New Zealand’s trade data for December. On Wednesday the 26th of January, we note the release of New Zealand’s CPI rates for Q4, while on Thursday the 27th, we get from the US the GDP advance rate for Q4 as well as durable goods orders growth rate for December. Finally on Friday the 28th,we get from Japan the Tokyo CPI rates for January, from the US, December’s consumption rate as well as the final University of Michigan consumer sentiment reading for January.

USD – Market focus on the Fed’s interest rate decision

The USD was supported this week and is about to end the losing streak of 4 weeks in a row. Rising yields tended to provide support for the greenback and its characteristic that the 10 year yield on Tuesday the 18th of January had reached 1.868% a level not seen for two years, exactly reflecting the market’s hawkish expectations. Overall, the market seems to have solidified its expectations for a tighter monetary policy and currently has priced in a rate hike of 25 basis points in the Fed’s March meeting and four rate hikes in total in the current year are frequently mentioned by analysts. Hence the Fed’s interest rate decision is expected to be in the epicenter of the market’s attention on Wednesday the 26th of the month. Currently FFF imply a probability for the bank to remain on hold at the January meeting of 96% and that remains our base scenario. Should the bank in its accompanying statement actually pave the way for a rate hike to come and meet or even possibly overcome the market’s expectations in sustaining a confident hawkish tone, we may see the greenback getting considerable support. Also do not underestimate Powell’s press conference later on which had also moved the markets in past decisions. As for financial releases we highlight the release of the US GDP rate advance for Q4 on Thursday the 27th of January and should the rate decelerate substantially, it may weaken the USD as it would be signalling a slower growth for the US economy, while a substantial acceleration could support USD. Also we would like to note the release of the Markit preliminary PMI figures for January on Monday, on Tuesday we get the US consumer confidence for January and on Wednesday we get the new home sales figure for December. On Wednesday before the release of the Fed’s interest rate decision, we also note the release of December’s durable goods orders growth rate and on Thursday besides the GDP rate, we also get the weekly initial jobless claims figure. On Friday the 28th , we note the release of December’s consumption rate and the final reading of the University of Michigan consumer sentiment for January.

GBP – Hawkish expectations for BoE as well

GBP seems about to end the week lower against the USD and JPY but not against the EUR, yet overall seems not to be so convincing about any bullish tendencies, quite the contrary. The situation in the UK political scene seems to remain unstable as the UK government is under pressure to resign over “party gate”, while at the same time the easing of measures to curb the spreading of the pandemic is noted. Plan B restrictions are to removed next week, in a move that could prove to be a gamble as on the one side it could be one step closer to the normalization of the economy, yet on the other hand, may allow the pandemic to spread faster thus slowing the recovery of the UK economy. On the monetary front we note BoE Governor Bailey’s comments that he is worried that inflationary pressures are to linger on in the UK economy, something that tilts the scale in favour of further tightening of BoE’s monetary policy to avoid a possible ingraining of inflation in the UK economic recovery. Overall, and given that the market seems to be pricing in a possible rate hike in BoE’s next meeting, beginning of February, the monetary outlook of the BoE could be supporting the pound for the time being. As for financial releases we highlight on Monday the 24th of January the release of the preliminary PMI readings for January, with special focus being on the UK services sector. Also, in the coming week we note the release of the CBI Industrial trends for orders and the CBI distributive trades indicator, both for January.

JPY – Safe haven flows to move JPY

JPY’s strengtening in the past week seems to continue against the USD, as the pair is about to end the week at slightly lower levels than it begun on Monday. However we should note that the JPY strengthened against the EUR and to a lesser extent against the GBP. On the fundamental level, Japanese worries about Coronavirus seem to intensify as the country has recorded the highest number of new daily Covid infections on Thursday the 20th of January. It should be noted that the Japanese Government has placed 13 prefectures including Tokyo, under a quasi state of emergency, due to the spreading of the pandemic. Fundamentally though, given international tensions we may also see JPY being sensitive to safe haven flows in the coming week. On the monetary front, we would like to make a comment on BoJ’s interest rate decision, on Tuesday the 18th of January. The bank as was widely expected, remained on hold and as we had mentioned in last week’s report raised its inflation forecasts reflecting the inflationary pressures in the Japanese economy. At the same time though, BoJ Governor Kuroda recognised that inflationary pressures were rising, but also stated that BoJ had no intention of raising rates, given that inflation is expected to remain below the bank’s target of 2%. Overall the outlook for BoJ seems to remain firmly dovish which could weigh on JPY. As for financial releases we note that on Monday the 24th of January we get the preliminary Jibun Bank Manufacturing PMI figure, while on Friday the 28th we note the release of Tokyos’ CPI rates for January.

EUR – Preliminary PMI figures to be the main release for EUR traders

EUR relented the gains made in the past week against the USD and is about to end the week in the reds. It should be noted that the common currency also retreated against the GBP, as well as the JPY in a sign of a broader market weakness of the common currency. On a monetary level we see that ECB’s dovish approach may be one of the factors weakening the EUR. It’s characteristic that ECB President Christine Lagarde in recent statements reiterated the narrative of a temporary nature of inflationary pressures as she stated that inflation in the Eurozone will decrease gradually over 2022, a statement which may imply that it may be less urgent for ECB to actually tighten its monetary policy. Should ECB officials continue to maintain a dovish stance in the coming week as well, we may see the EUR retreating as the interest rate differential outlook which could be tilting in favor of the Fed as well as the BoE, which are tightening their monetary policies at a faster rate, instead of the ECB. In EURs’ fundamentals we note the crisis in the Ukraine as a possible escalation of the tensions in the area could increase the price of natural gas, which in turn could slowdown the economic recovery of the area, thus could weigh on the common currency. Also the pandemic has still a strong presence in the continent and should be taken into account.As for financial releases we highlight on Monday the release of the preliminary PMI figures for January for Germany, France and the Eurozone as a whole. Specifically we intend to focus on Germany’s manufacturing sector, France’s Services sector and Eurozone’s Composite PMI reading for a more rounded view. Should the reading rise we may see the common currency getting some support as they would imply an expansion of economic activity at a faster pace for the area. On second note we would also like to mention the release of Germany’s January Ifo indicators on Tuesday the 25th of the month, as well as Germany’s forward looking GfK Consumer Sentiment for February on Thursday the 27th of January.

AUD – Q4 CPI rates eyed

The Aussie is about to end a second week near the same levels it started on Monday. On a monetary level we may see the market also expecting a more confident stance on behalf of the RBA which could provide some support for the AUD should it intensify. It should be noted that the better than expected employment data for December released on Thursdays’ Asian session, tended to exactly provide additional expectations for RBA’s stance as the unemployment rate dropped more than expected and the employment change figure dropped less than expected, both signalling that the tightening of the Australian employment market continues. On a more fundamental level, market sentiment could be the main factor behind the commodity currency’s direction in the coming days as should there be a more risk on approach it could provide tail winds for the Aussie and vice versa. As for financial releases we highlight the release of Australia’s CPI rates for Q4, on Tuesday the 25th of January, which would complete the picture of the Australian economy. Should the CPI rates actually accelerate, we may see the AUD getting additional support before RBA’s meeting on the 1st of February. On second note we would also like to mention the release of Australia’s preliminary Markit PMI figures for January on Monday the 24th of the month.

CAD – BoC to hike rates?

The CAD, showed some signs of weakness against the USD in the current week. The possibility of oil prices rising further could provide renewed support for the Looney as Canada is considered a major oil producing country, yet we have to note that oil prices corrected lower for a second day yesterday and were still dropping during today’s Asian session. Expectations for a tight supply of the commodity, the tensions in the Middle East and the possibility of escalating tensions in the Ukraine tended to be factors that drove oil prices higher in the current week, yet some of these factors may fade away in the coming week. Should oil prices continue to drop, we may see the CAD retreating. Inflationary pressures in the Canadian economy seem to have remained strong for December both on a headline as well as at a core level, where the metrics reached an over thirty year high. Such inflationary pressures in combination with the positive employment data for December may imply greater expectations for a tightening of BoC’s monetary policy, which is a plus factor for the Looney. The market’s questions are to be answered on Wednesday the 26th of January as BoC’s interest rate decision is to be released. Currently CAD OIS imply a probability of 87.33% for a 25 basis points rate hike to be performed by BoC, thus raising its interest rate from 0.25% to 0.50%. Should the bank actually hike rates, which is also our base scenario and should the bank’s statement also show a determination to keep inflation under control by further rate hikes if needed, we may see the CAD getting some support. Given the lack of high impact financial releasesfrom Canada, we would expect fundamentals such as oil news, market sentiment and BoC’s monetary policy to lead the Looney in the coming week.

General Comment

Overall, in the coming week we may see the USD regaining its dominance in the forex market over other currencies, given the gravity and frequency of financial releases expected. Nevertheless, next week’s calendar seems to continue to provide the chance for other currencies to shine as well, yet not that often as in the past week. Also in the FX market, besides the prementioned data and releases we intend to focus on NZD as well and we note the release of New Zealand’s trade data for December on Tuesday, as well as New Zealand’s Q4 CPI rates on Wednesday, which could provide volatility for Kiwi pairs. Besides the FX market we note that for US stockmarkets the earnings season is in full development, yet the course of the US yields as well as the market’s hawkish expectations, seem to create a distortion. It should be noted though that in the coming week we expect earnings releases such as Tesla, Apple, Johnson and Johnson and other to gather substantial attention. As for gold’s price we highlight that the negative corelation with the USD was distorted as both the USD and gold were on the rise in the past few days, with the precious metal breaking a new monthly high, as it surpassed a substantial resistance level, before correcting lower.

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