Forex Major Currencies Outlook (Jan 17 – Jan 21)

USD 

World Bank came out with 2022 projections of global GDP growth and shrank it to 4.1% from 4.3%. US GDP for 2022 was downgraded to 3.7% from 4.2% previously. They project global GDP for 2023 to rise at 3.2%. Possible surge in Omicron cases that leads to the overwhelming of health systems could shave off additional 0.7pp from projected numbers. 

Fed Chairman Powell made testimony in front of the Senate and reiterated the Fed’s stance. Asset purchases will finish in March and rate hike cycle will begin around that time. Powell added that the Fed may begin reducing the size of the balance sheet near the end of the year if the economy continues accelerating as expected and it will be done "sooner and faster" than last time. On the inflation front, chairman stated that Fed will fight to defend price stability adding that inflation may stay elevated through the H1. 

Inflation report for December showed headline number at 7% y/y as expected. The last time it was at 7% Volcker was Fed chairman and yield on UD10y was 14%! It was back in 1982. In comparison, current yield on US10y is around 1.75%. Core inflation reading came in at 5.5% y/y vs 5.4% y/y as expected. Used car prices rose 3.5% y/y with a jump in clothing prices of 1.7% y/y. Housing and food categories also contributed to price increases while decreases were seen in the fuel category. The headline figure suggests that Fed will need to step up and proceed with faster tightening. St. Louis Fed president Bullard was talking about 4 rate hikes after the report while Cleveland Fed president Mester, both are well known hawks, called for faster tightening policy. 

Retail sales for December showed a decline across the categories. Headline number showed a drop of -1.9% m/m vs 0% m/m as expected. Control group, the reading used for GDP calculation, dropped even deeper as it came in at -3.1% m/m. Omicron fears contributed to the miserable result. There is also a possibility that surging inflation led to the fall in disposable income, therefore reflecting in lower spending.

EUR

Industrial production in the Eurozone for the month of December rose 2.3% m/m vs 0.5% m/m as expected and dropped -1.5% y/y vs 0.6% y/y as expected. Previous month’s readings were heavily downgraded, thus making the headline numbers look less impressive. German and French reading dipped slightly while the Spanish and Dutch readings improved. However, there are positives in the reading, mainly production and backlog of orders continue to rise. This indicates that the issue is on the supply side, that is supply chain disruptions and labour shortages due to restrictions. Germany reported GDP for the entire 2021 at 2.7%. There are still concerns that Q4 GDP has dropped.

GBP

November GDP surprised positively by coming in at 0.9% m/m vs 0.4% m/m as expected. Additionally, October reading was revised up to 0.2% m/m from 0.1% m/m. The UK is on the path for another quarter of GDP growth and GDP has now surpassed pre-pandemic levels. The reading has increased chances of BOE rate hike in February with implied probability of hike hovering around 75%. Services output advanced 0.7%, industrial production rose 1% while construction output jumped 3.5%. Prime minister Johnson is facing growing discontent within the UK voters for the way he handles covid situation as well as for the growing number of scandals. Latest scandal included party in Downing Street during the lockdown in May of 2020. He has apologized for his transgression but his popularity took another hit. Labour Party leader characterized Prime minister’s excuse as was "ridiculous" and "offensive."

This week we will have employment, inflation and consumption data.

Important news for GBP:

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI

Friday:

• Retail Sales

AUD

Australian trade balance for November came in at AUD9.42bn, down from AUD10.78bn the previous month. Although global demand subsided due to emergence of Omicron variant, exports still managed to increase 2%. Lifting of restrictions led to increase in domestic demand which contributed to imports rising 6%. Inflation data from China for the month of December showed CPI at 1.5% y/y vs 1.8% y/y as expected and down from 2.3% y/y in November. PPI recorded a second consecutive month of prices rising at slower pace and came in at 10.3% y/y vs 12.9% y/y in the previous month. December trade balance data from China showed surplus rising to $94.6bn due to a plunge in imports (19.5% vs 31,7% in November). Exports were stable at 20.9% vs 22% the previous month. 2021 was a great year for China's trade as trade surplus widened to a new record high of $ 676.4bn on the back of exports rising almost 30%.

This week we will have employment data from Australia as well as GDP, production and consumption data from China.

Important news for AUD:

Monday:

• GDP (China)
• Industrial Production (China)
• Retail Sales (China)

Thursday:

• Employment Change
• Unemployment Rate

NZD

Kiwi had a decent week thanks to the weak data coming from the US and subsequently weak USD, so NZDUSD rallied around 90 pips. Concerns regarding potential China shutdown due to the omicron outbreak caused it to be much weaker against the safe haven JPY and NZDJPY dropped almost 150 pips for the week.

CAD

CAD has enjoyed a tremendous week. Helped by rising oil and lumber prices as well as weak USD it has rallied more than 150 pips against the USD during the week and more than 250 pips from the highs of the week. USDCAD pair has ticked its monthly low, however further falls cannot be excluded.

This week we will have inflation and consumption data.

Important news for CAD:

Wednesday:

• CPI

Friday:

• Retail Sales

JPY

BOJ survey showed that 78.8% of households expect prices to rise in the year ahead while 80.8% expect prices to rise 5 years ahead. The survey may influence BOJ decision next week and we could see a drop of reference to downside inflation risks. BOJ has raised its assessment for all 9 regions compared to October of 2021 as economic activity picks up across the country followed by the removal of restrictions.

This week we will have BOJ meeting. There will be no changes to the rate or yield curve control, however we may see changes to the inflation expectations.

Important news for JPY:

Tuesday:

• BOJ Interest Rate Decision

CHF

SNB total sight deposits for the week ending January 7 came in at CHF724.6bn vs CHF722.8bn the previous week. Increase in SNBs activity probably led to EURCHF climbing over the 1.04 level and staying there.

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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.}