Forex Major Currencies Outlook (Jan 31 – Feb 4)

USD 

Fed has left rates unchanged at their January meeting as was widely expected. There was no speeding up of taper, it will end in early March. With inflation running at well above 2% and strong labor market committee members stated that it will be appropriate to start raising interest rates at the coming meetings. Fed funds rate remains primary tool for the tightening of monetary policy. Chairman Powell did not rule out hiking at every meeting adding that "Quite a bit of room to raise rates without hurting jobs". He added that discussion about balance sheet reduction will be held at the next two meetings. Separately published document regarding balance sheet it was stated that "reducing the size of the Federal Reserve's balance sheet will commence after the process of increasing the target range for the federal funds rate has begun". Markets are now pricing in a rate hike in March at around 80%. 

Advance reading of Q4 GDP came in at 6.9% vs 5.5% as expected. Personal consumption rose 3.3% vs 2% in Q3 and thus contributed 2.25bp to the reading. The biggest contributor was gross private domestic investment with 5.15bp. Inventories surprised with a 4.9bp contribution to the Q4 GDP. December PCE headline number ticked up to 5.8% y/y from 5.7% y/y in November while core PCE came in at 4.9% y/y vs 4.7% y/y the previous month. The IMF downgraded forecast for global GDP in 2022 to 4.4% from 4.9% projected in October. The virus, higher inflation, and high debt levels were key considerations. Failure to pass Build Back Better infrastructure project also contributed to the downgrade. 

This week we will have ISM PMI data as well as NFP data on Friday. Headline number is expected to come at around 240k with the unemployment rate staying at 3.9% while earnings are expected to come above 5% y/y. 

Important news for USD: 

Tuesday:

• ISM Manufacturing PMI

Thursday:

• ISM Non-Manufacturing PMI

Friday:

• Nonfarm Payrolls
• Unemployment Rate
• Average Hourly Earnings 

EUR 

Preliminary PMI data from Eurozone were influenced by improvements in German readings and drops in French readings. Manufacturing managed to climb to 59 from 58 in December thanks to German reading coming in at 60.7. Services reading fell to 51.2 which is the lowest level since April of last year. The drop was influenced by Omicron outbreak but as Markit notes the fact that reading is still above 50 indicates that impact of the virus on the economy should not be severe. Composite reading came in at 52.4 assisted by German reading returning to expansion with a healthy 54.3. Markit notes that “prices for goods and services are rising at a joint-record rate as increasing wages and energy costs offset the easing in producers’ raw material prices, dashing hopes of any imminent cooling of inflationary pressures.” Business have reported that input prices are rising at a much slower pace, slowest since April, which should ease inflation pressures. 

German Ifo survey showed a break in the six-month downtrend for business climate and expectations categories. They came in at 95.7 and 95.2, up from 94.8 and 92.7 in December respectively. Current situation category continued to deteriorate and came up at 96.1, down from 96.9 the previous month. Bright spots are on the horizon, as Ifo economist notices, same as in the preliminary PMI reports, that there is easing in supply shortages in both industrial sector and in raw materials. 

This week we will have preliminary Q4 GDP and January CPI data as well as ECB meeting. No changes in rate and policy are expected but wording will be monitored for information on how the bank plans to navigate stimulating the economy with fighting the inflation. 

Important news for EUR: 

Monday:

• GDP

Wednesday:

• CPI

Thursday:

• ECB Interest Rate Decision 

GBP 

UK preliminary PMI data showed manufacturing drop to 56.9 from 57.9 the previous month and services slide to 53.3 from 53.6 in December. Markit noted that "Business confidence in the outlook also picked up, driving sustained solid jobs growth. With inflationary pressures remaining elevated at near-record levels, this all adds to the likelihood of the Bank of England hiking interest rates again at its upcoming meeting.” Similar to the Eurozone reading there are signs of supply chain issues resolving which should lead to lower input costs for business and lower costs for consumers (lower inflation). 

This week we will have a BOE meeting. A 25bp rate hike is expected which will lift bank rate to 0.50%. The BoE said they will stop reinvestments of maturing bonds (QE) when the Bank rate hits 0.5%, thus we see quantitative tightening starting from this meeting. 

Important news for GBP: 

Thursday:

• BOE Interest Rate Decision 

AUD 

Inflation data for Q4 showed headline CPI rising 1.3% q/q and 3.5% y/y vs 0.1% q/q and 3.2% y/y as expected. Trimmed mean reading, it is a core inflation readings which RBA targets to be in 2-3% y/y range, came in at 1% q/q and 2.6% y/y vs 0.7% q/q and 2.4% y/y. The numbers are elevated but still well within RBA’s range, therefore they will not have impact on the incoming monetary policy meeting. Additionally, RBA’s main concern is wage growth. Data for Q4 wages will not be available until the end of February. 

This week we will have a RBA meeting and later on a Statement on Monetary Policy. The meeting will bring and end to bond purchases, planned to go through at least mid-February. 

Important news for AUD: 

Tuesday:

• RBA Interest Rate Decision 

NZD 

Q4 inflation data printed 1.4% q/q and 5.9% y/y. Both came in higher than expected with yearly figure now at a 31-year high. RBNZ will not be deterred from its rate hike path. Some analysts call for at least 7 rate hikes while others scream for a 50bp hike at the February 23 meeting. 

This week we will have Q4 employment data. 

Important news for NZD: 

Tuesday:

• Employment Change
• Unemployment Rate 

CAD 

BOC delivered a mild surprise for investors by keeping the rate unchanged at 0.25%. Although there was a reduced chance of a rate hike since we wrote our call for a rate hike, markets were still giving it around 70% chance. Bank members now see that overall economic slack is absorbed and have removed exceptional forward guidance on interest rate. They see Omicron as a threat to the activity in Q1 but expect economy to continue strongly and see GDP for 2022 at 4%. Inflation is expected to reach 5% in H1 of 2022 due to supply constraints. Governor Macklem stated that BOC will need to raise interest rates in order to fight inflation and that they will go on a path of rate hikes. It seems that they are waiting to see how Fed will act and take clues from them. March 2 is the next meeting and we expect BOC to deliver a rate hike. 

This week we will have employment data. 

Important news for CAD: 

Friday:

• Employment Change
• Unemployment Rate 

JPY 

Preliminary PMI data for January show manufacturing improving to 56.6 from 56.3 the previous month on the back of stronger growth seen in output, new orders (export orders as well) and backlog of orders. Output prices see stronger inflation, while input prices show weaker inflation as input costs are starting to subside. Services PMI, on the other hand, recorded a sharp drop to 46.6 from 52.1 in December. The drop was caused by the Omicron outbreak and all components of the reading are declining. Composite was dragged to 48.8 by the drop in services reading and only bright spot are new export orders which point to a stronger growth. 

CHF 

SNB total sight deposits for the week ending January 21 came in at CHF724.8bn vs CHF724.5bn the previous week. It is a bit surprising that SNB is standing on the sidelines when EURCHF has breached the multi-year lows. Most likely they are biding their time waiting to strike when they will be able to make the most with the least amount of intervention.

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}