Forex Major Currencies Outlook (Feb 7 – Feb 11)

USD 

Atlanta Fed president Raphael Bostic stated in an interview with Yahoo Finance that 50bp rate increase in March is not preferred policy action. He still sees 3 rate hikes in 2022. Kansas City Fed president Esther George, a voting member in 2022, stated that current very accommodative stance of monetary policy is out of sync with the economic outlook, adding that it could be appropriate to more earlier on balance sheet reduction. She is a well known hawk. 

NFP headline number in January surprised to the upside coming in at 476k vs 150k as expected. Participation rate increased to 62.2% from 61.9% in December which caused the unemployment rate to tick up to 4% from 3.9% the previous month. Wages were the highlights of the show as they rose 0.7% m/m and 5.7% y/y. This will add more to the demand-pull inflation and it will show up in the next week’s reading. Additionally, this data point cements Fed rate hike in March. A question about a 50bp will start popping up again. Probability of a 25bp rate hike at March meeting according to FedWatch Tool is at 80.8% while a 50bp rate hike probability rose to 19.2%. 

This week we will have inflation data. Both readings are expected to continue rising with headline number printing 7.2% y/y and core number printing 5.9% y/y. 

Important news for USD: 

Thursday:

• CPI 

EUR 

Preliminary Q4 GDP reading showed the Eurozone economy expanding by 0.3% q/q and 4.6% y/y. The impact of the Omicron did not derail the economy as much as feared and proved that Europeans are learning to live with the virus. Growth was seen in France, Italy and Spain, while German economy contracted and negatively impacted overall GDP. According to seasonally adjusted data GDP growth for 2021 was at 5.2%. 

German retail sales for December fell -5.5% m/m. A combination of post-holiday shopping and increasing inflation weighs on consumers and we may expect similar results from other EU countries. Stark contrast in inflation data saw German reading fall to 4.9% y/y from 5.3% y/y in December due to the reversal of VAT base effects from the calculation, reminder VAT was scrapped when pandemic began and then reintroduced in January of 2021. Expectations were for a bigger drop in inflation, 4.3% y/y. On the other hand, French reading ticked up to 2.9% y/y from 2.8% y/y the previous month, however still well below the German reading. Finally, preliminary EU inflation data for January came in at 5.1% y/y vs 4.4% y/y as expected and up from 5% y/y in December. The main culprit for the record high reading were energy prices which rose 28.6% y/y. Core inflation, on the other hand, came in at 2.3% y/y vs 1.9% y/y as expected, down from 2.6% y/y in December. Core numbers indicate that there is not muc spillover effect from the surging energy prices. 

ECB left rates unchanged and came out with a virtually unchanged statement. The only difference from December’s statement was that Governing Council is now prepared to adjust its instruments “in either direction”. PEPP will end in March and APP purchases will end shortly before the rate hikes begin. Q1 growth will be slower due to restrictions caused by Omicron, particularly services sector. Later year growth will increase on the back of domestic demand. Then a true hawkish shift came in at the press conference. ECB president Lagarde started by saying that inflation will be elevated for longer than expected adding that it may be significantly higher than expected this year. She did not exclude a possibility of a rate hike later in the year. EURUSD rose almost 100 pips on her comments and continued to rise as market participants see rate hikes incoming by the year-end. March meeting is seen as a turning point for the monetary policy with some analysts calling for ending of APP program in June and first hikes in September. Others even see a hike in December following the one from September or just one in December. 

GBP 

BOE has delivered what all of the investors were expecting and raised interest rates by 25bp to 0.50%. The vote for rate hikes was split 5-4 but the 4 members voted for a 50bp interest rate hike to 0.75%. Members stated that rate hike is necessary due to the tightness of labor market and signs of greater persistence of domestic cost pressures. Inflation peak is now seen at around 7.25% in April. With the rate now at 0.50% BOE will start the first phase of balance sheet reduction, which consists of not reinvesting proceeds from matured bonds. A very hawkish BOE that will continue to raise rates at the March meeting. Governor Bailey has added at the conference that impact of Omicron will be short-lived. He also had an interesting remark that basically comes down to workers should not be pushing for higher wages right now. He meant it as a way to curb inflation but his comments came out as very insensitive. Later on her added: "I am not saying don't give your staff a pay rise, this is about the size of it". 

This week we will have a preliminary Q4 GDP reading. 

Important news for GBP: 

Friday:

• GDP 

AUD 

RBA February meeting saw cash rate remain at 0.10% and an end to their QE program as we stated previous week. Bond purchases (QE) will conclude on February 10. The accompanying statement said “The Omicron outbreak has affected the economy, but it has not derailed the economic recovery.” Board members recognized that inflation has increased recently, however they think it is too early to conclude that it is sustainably within the target band of 2-3% for core CPI. Additionally they pose the question persistent the pick-up in inflation will be once problems on the supply-side get resolved. Members have reiterated their stance that “will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range". They added that wage growth is modest and that they expect a gradual rise in wages. As a reminder, governor Lowe stated repeatedly that they wish to see wages rise north of 3% before considering increasing rates. Regarding the balance sheet reduction statement says “The Board will consider the issue of the reinvestment of the proceeds of future bond maturities at its meeting in May.” 

Both official and Caixin manufacturing PMI data showed that sector is struggling at the beginning of the year. Data in January came in at 50.1 and 49.1 respectively, falling from 50.3 and 50.9 in December. Growing covid cases and China’s zero-covid policy are putting pressure on the sector with Caixin reading returning into contraction and printing the lowest number since February of 2020. 

NZD 

Employment data for the Q4 were mixed. The unemployment rate slipped to 3.2% from 3.4% in Q3 and it is now at the lowest level since 1986. Digging into the details we can see that participation rate slipped down to 71.1% from 71.2% in the previous quarter. Wages continued to rise with average hourly wages increasing 3.8% q/q and private wages going up by 2.8% q/q. However, employment change stalled as it grew by 0.1% q/q and 3.7% y/y in Q4 compared to 2% q/q and 4.2% y/y in Q3. This reading will strengthen the chance of a rate hike by RBNZ at their meeting on February 23. There was another strong global dairy auction that saw GDT Price Index rise 4.1%. This makes a second consecutive auction of rises over 4% improving New Zealand’s terms of trade at a fast pace. 

CAD 

Employment report for January presented us with a picture of economy heavily impacted by Omicron. Restrictions in most provinces led to employment change coming in at -200k vs -125k as expected. Other data are not encouraging as well with participation rate dropping to 65% from 65.4% in December and the unemployment rate jumping to 6.5% from 6% the previous month. Wages also declined coming in at 2.4% y/y vs 2.7% at the end of the last year. Now that the restrictions have been lifted we will see improvement in February reading which will strengthen BOCs determination to raise rates at March meeting. November GDP figure came in at 0.6% m/m vs 0.4% m/m as expected. October reading was at 0.8% m/m. 

JPY 

Industrial data from Japan showed a slowdown in December by coming in at -1% m/m, however projections for the new year are much brighter. Retail sales also slumped by -1% m/m in December but with potential for another state of emergency around the country looming, chances of it getting stronger are low. 

CHF 

SNB chairman Jordan stated that some of the inflation is transitory and that bank expects it to come down in the coming months, however central banks must make sure that it does not become permanent which requires a careful monitoring of the situation. He added that strong Swissy is limiting inflation and that he sees no signs of wage price cycle. Retail sales in December fell -2% m/m and -0.4% y/y. November y/y reading was at 5.3%. A combination of post-holiday shopping and increasing inflation weighs on consumers.

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