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Weekly Forex Market Outlook

Weekly Market Outlook

Central banks and financial data eyed 

For another week, US fundamentals tended to capture most of the headlines and the trader’s attention. Albeit I consider that US fundamentals continue to affect the markets, I also believe that several events could shift attention to other regions. 

The week ahead will be a busy one, given that on the monetary front we highlight the interest rate decisions of BoC on Wednesday and ECB and BoJ on Thursday. At the same time, I also note the interest rate decisions of Norway’s Norgesbank and Turkey’s CBRT. 

As for financial releases, we get an early start on Monday with the heavy impact of China’s GDP growth rate for Q4. Among a slew of data, we also highlight UK’s, Eurozone’s and Canada’s inflation rates for December on Wednesday.

On Thursday, we get Australia’s employment data for December, the US weekly initial jobless claims figure and New Zealand’s CPI rates for Q4. On Friday, besides the preliminary PMI readings of January for Australia, Japan, UK, Eurozone and the US, we also note the release of UK’s retail sales for December and Canada’s retail sales for November. Let’s get in more details.

USD – US fundamentals to continue to dominate the headlines

Since early November, the USD seems to have stabilised in a wide rangebound movement in the past days after breaking the downward trendline characterising its movement.
 
Federal Reserve Chair Jerome Powell stated on Thursday that interest rates would not rise any time soon. Powell in an interview practically expressed the opinion that the US economy has still a long way for recovery and is still far from where the Fed wants it to be and that he sees no reason to alter its highly accommodative stance “until the job is well and truly done.“ 
 
At the same time the release of President-elect Joe Biden’s $1.9 trillion stimuli, more or less failed to give the greenback some support, given that several points had already been reported by the media, finding the markets ready for what they heard. 
 
Nevertheless, if approved, the fiscal stimulus could provide a considerable push for the economy, expediting its recovery. 
 
Also, President Trump’s impeachment and the inauguration of President-elect Biden are expected to keep grabbing the headlines for the US political scene. 
 
Please note that on the coronavirus front, we tend to maintain our worries for the number of cases in the US, despite the ongoing vaccination and should they be on the rise we may see a more cautious stance emerging in the markets. 
 
As for financial releases, I note on Thursday the Philly Fed Business Index for January, the number of building permits for December, and the weekly initial jobless claims figure. On Friday, we get the preliminary Markit PMIs for January.

GBP – CPI and retail sales in the epicentre

GBP is weakening against its main competitors on Friday. It came under pressure after the release of a bloc of negative economic statistics. 
 
In November, UK GDP fell by 2.6% amid a new national quarantine, which was the first decline since April last year. The recession in the economy provided by the service sector fell by 3.4%. Chancellor Rishi Sunak said that the situation in the economy might deteriorate further before improvement occurs. 
 
Industrial production data were also negative. For November, its volume decreased by 0.1% MoM instead of the expected growth of 0.5% and fell by 4.7% YoY instead expected 4/2% decline.
 
However, traders seem to continue to have some confidence for the GBP even though it has dropped on Friday after two days of range, as it strengthened against EUR previous days. 
 
With Brexit having little effect on the pound’s direction, the main fundamental issue troubling pound traders seems to be the course of Covid over the UK. 
 
The issue seems to weigh on the pound, and concerns about the UK’s economic outlook’s possible adverse effect are considerable. It’s characteristic that the Chancellor of the Ex Chequers Sunak, stated that the UK’s economy could get worse before it gets any better. 
 
However, the most influential comment in the past week may have been BoE Governor Bailey’s statement that there are “lots of issues” with cutting rates below zero and such a move could hurt banks. 
 
The statement dampened if not erased expectations for the bank to lower its rates into the negatives and provided support for the pound. 
 
Pound traders will closely watch Bailey’s comments coming Wednesday. 
 
As for financial releases, I would highlight the UK’s CPI rates for December on Wednesday and Friday the retail sales growth rate for December and the preliminary PMI readings for January.

EUR – ECB, COVID 19 and preliminary PMIs to move the EUR

When it comes to the euro, I believe that it will be a busy week for EUR traders as the common currency could be affected by many factors. 
 
Starting with the fundamentals, the path of the pandemic in Europe remains the critical issue.
 
 France expanded a daily 12-hour curfew nationwide starting Saturday. German Chancellor Angela Merkel is promoting a tougher lockdown, given the concerns that a more-contagious coronavirus variant could lead the infections out of control.
 
 According to German media, the tightening of the lockdown measures could include curfews and schools’ closing. 
 
In general, the spreading of the pandemic could delay Eurozone’s economic recovery and dampen its outlook. On the other hand, the ECB is expected to keep rates unchanged, and currently, EUR OIS imply a probability of 95% for such a scenario to materialise. 
 
Lagarde’s’ recent speech more or less reassured the markets that the bank plans to keep an accommodative policy. The bank seems to incline towards using its PEPP program to support the economy, rather than rates. 
 
It would be interesting to see whether the bank considers altering its projections and is watching over the exchange rate of the common currency. 
 
As for financial releases, the critical data would be the preliminary PMIs for January on Friday. I would also highlight Germany’s ZEW indicators for January on Tuesday, Eurozone’s final HICP rate for December on Wednesday and Eurozone’s preliminary consumer confidence for January on Saturday.

AUD – Focus on employment and Chinese data

AUD seems to be weakening against the USD as it has broken the upward trendline incepted since the 11th of January. 
 
Even the improvement of China’s trade data on Thursday left Aussie traders rather unimpressed. 
 
Media headlines about the rising cases of Covid 19 in China and the possibility of China wanting to break its dependency on Australian iron ore tend to create worries for the Australian commodity currency. 
 
On Monday’s Asian session, we get China’s GDP rates for Q4, as well as the industrial output growth rate for December, keeping Aussie traders on the edge of their seats. 
 
Also, I highlight the release of Australia’s employment data due out on Wednesday’s Asian session, which could generate considerable interest among Aussie traders and Friday the preliminary PMI readings for January.

CAD – Oil prices and BoC to influence the CAD

CAD’s strengthening against the USD seems to be threatening in the past few days. Given the recent stabilisation of oil prices and the fact that Canada is one of the primary oil producers, some hesitation on behalf of Looney traders is understandable. 
 
On the one hand, the recent decision by Saudi Arabia to proceed on its own with production cuts provided a necessary boost for oil prices, while at the same time also strengthened the CAD.
 
 On the other hand, though, the recent resurgence of Covid 19 cases tends to create worries for the demand side of the black gold, as a slowdown of economic activity is entirely possible. 
 
However, in the coming week, CAD traders will keep an eye out for BoC’s interest rate decision. The bank is widely expected to remain on hold, keeping rates unchanged at 0.25% and currently, CAD OIS imply a probability of almost 92% for such an outcome. 
 
The recent employment data showed a wide slack in the Canadian employment market and seemed to push the bank for some action. 
 
Given that the bank had practically ruled out the possibility of negative interest rates, we should not rule out the bank’s possibility proceeding with a mini cut of 15 basis points. 
 
Overall, I see the event’s risks as tilted to the bearish side for the CAD. 
 
As for financial releases, I highlight Wednesday the inflation rates for December and the retail sales for November on Friday. The number of House starts for December and manufacturing sales for November due out on Monday and Tuesday could also be necessary for CAD traders.

The upcoming week will be very interesting, we may see the USD relenting some of the initiatives to other currencies as local issues may take some precedence for their respective currencies.

Issues such as the path of the pandemic in various countries tend to remain a cause of worry for their respective currencies. The scariest part of the pandemic now is the new strain of the virus and the question if the current vaccines could stop it.

Also, the high number of interest rate decisions by central banks and financial releases scheduled for the coming week could shift the focus of the markets away from the USD at least temporarily. 

Given the fact that the number of high impact financial releases is rather low, US fundamentals are expected to keep affecting the markets and the possible inauguration of President-elect Biden could remove some uncertainty from the markets. 

The possibility for some riots by Trump supporters should not be ruled out, especially after the storming of the Capitol in the past week. The issue of the proposed fiscal stimulus by Biden could also remove some uncertainty in the economic sector and highlight the US economic outlook, as well as underscore the possibility of a swifter recovery. Also, some speculation among analysts about the Fed’s monetary policy stance could make headlines and affect the markets, ahead of the Fed’s meeting on the 27th of the month.

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