Weekly Forex Outlook (January 22-26, 2018)
January 22, 2018

Weekly Forex Outlook of Dollar Index

Forex Outlook: 

The economic reports from the US during last week were disappointing as the housing starts and building permits fell, consumer confidence slipped and the manufacturing activity in the Philadelphia and NY region also slowed.

However, the major theme revolving around dollar during the week which kept investors out of the dollar index was the shutdown in Washington. The Trump administration is bracing for a government shutdown, based on the press briefing by White House on Friday and would be a first government shutdown in 4 years.

  • FED Speaks: In the week ahead, there will be no Fed speeches as the blackout period for the Federal Reserve begins from January 20th until February 1st.
  • PMIs (Wednesday):The first major release will be the Manufacturing, Services and Composite PMIs from IHS Markit for January. The Manufacturing PMI is expected to show a slight increase from 55.1 to 55.8 and the Services PMI is expected to slip from 53.7 to 53.

US GDP (Q4) (Prelim) (Friday):  The final reading of US GDP for Q3 slipped with a downgrade to 3.2% annualized growth from 3.3% seen in the previous reading. The preliminary reading for Q4 is expected in the week ahead. We expect the US GDP to come in at 3% (Consensus: 3%). Currently, the Atlanta Fed GDP Now tracker is at 3.4%, while the New York Fed’s GDP Nowcast model is at 3.9%.

  • US Durable Goods Orders (Friday)The Durable Goods increased by 1.3% for the month of November. As per the prediction model, We expect the US durable goods orders to increase by 0.6% in December. The transportation equipment orders, which contributes to more than 30% to the overall orders is expected to increase by a modest 0.8%, with Non-Defense and Defense sectors expected to show slowdown. Machinery (2.4%), Computers and electronic products (0.9%) and Electrical equipment (1%) are all expected to increase, while Primary Metals (-0.1%) and Fabricated metal orders (-1.6%) are expected to slip from November to December.
  • The US government shutdown happened after markets closed and has yet to take effect. This is the first time the US government has shutdown in 4 years. The last time the U.S. government was officially shut down was in October 2013 for 16 days. Day one of the government shutdown ended with no sign of progress towards ending the impasse. The Republican leader of the US Senate, Mitch McConnell, has said there will be a vote at 06:00 GMT on Monday on a bill to fund the government until 8 February. The Dollar Index is expected to remain under the pressure during the week, however the government shutdown is not expected to be a long-term factor that drives the Dollar Index lower.

See Economic Calendar for more details

Weekly Forex Outlook of EUR/USD

 

Forex Outlook: 

ECB members Weidmann and Coeure were scheduled to speak. ECB’s Weidmann was of the opinion that announcing a QE end date is justifiable and ECB’s Coeure had recently stated that that policymakers are becoming comfortable in talking about the end of the central bank’s QE program.

However, the euro weakened due to political uncertainty after the Berlin’s SPD rejected coalition talks with Merkel’s Conservatives Party. Euro weakness continued after the ECB announced that the ECB was unlikely to drop pledge in the week ahead to keep buying bonds until inflation heads towards target. The sources also suggested that the ECB’s policy-making governing council stated any fundamental change to guidance was likely to come only later, with the March meeting, when policymakers got updated economic forecasts. Dovish comments from ECB’s Villeroy, Constancio and Nowotny added further pressure on the euro. However, the pair was driven by the weakness in the Dollar Index due to the concerns regarding the US government shutdown.

  • ZEW Survey (Tuesday):The ZEW institution’s survey of the economy has been stable recently, with minimal changes to the headline numbers. The all-European figure is projected to increase from 29 to 30, while the German figure is also expected to tick up to 17.8 from 17.4.

Eurozone PMIs (Wednesday): For the whole euro-zone, the preliminary readings of PMIs are expected in the week ahead. The manufacturing PMI is expected to drop from 60.6 to 60.4 and the services PMI from 56.6 to 56.5 points.

  • German Politics:On Sunday, the Germany’s center-left Social Democrats (SPD) will decide whether to start formal coalition talks with Chancellor Angela Merkel’s conservatives. Around 600 delegates will debate and vote on whether their leaders should push ahead with coalition talks. Michael Groschek, the SPD party leader for North Rhine-Westphalia (NRW), which accounts for around a quarter of SPD delegates, has joined Martin Schulz in terms of positive rhetoric around the party vote. SPD parliament leader Andrea Nahles has suggested that around a third of the party’s delegates are still undecided on how they will vote, however, she believes that a majority of the party will vote to endorse the talks. Also, SPD’s youth and left wings are opposing the coalition talks.
  • ECB Interest Rate Decision, Monetary Policy Statement and Press Conference (Thursday): The ECB is not expected to change its policy at the upcoming meeting. The ECB recently announced that it was unlikely to drop pledge in the week ahead to keep buying bonds until inflation heads towards target. The sources also suggested that the ECB’s policy-making governing council stated any fundamental change to guidance was likely to come only later, with the March meeting, when policymakers got updated economic forecasts. However, the focus is expected to fall on ECB President Draghi’s press conference.
  • The week ahead features two major risks in the form of German coalition talks and ECB Draghi speech. If the German coalition vote fails, it would prolong political deadlock resulting in new elections or a minority government and the pair is expected to crash and if it succeeds, the pair could gain further, however gains are expected to be capped until the ECB Interest Rate Decision and ECB President Draghi’s speech for further clues.

See Economic Calendar for more details

Weekly Forex Outlook of USD/JPY

 

Forex Outlook: 

With no major US economic reports on the calendar in the previous week, the pair was expected to remain under pressure as we expected Yen to continue to strengthen on talks of Bank of Japan’s taper and continued nervousness following China’s threat to reduce or halt their purchases of Treasuries.

The Yen initially weakened after jawboning from Japanese officials (Japan finance minister Aso and economy minister Motegi), highlighting that sudden moves in exchange rates were a problem. However, the Yen strengthened due to weakness in the Dollar index and Risk off mode due to the concerns regarding the US government shutdown.

Monetary Policy Statement & Press Conference (Tuesday): The BoJ is expected to keep its interest rates unchanged and are likely to maintain their bond-buying program. BoJ recently stated that it is optimistic in achieving their 2% inflation target within two years but are cautious on the next move. This is likely to be reiterated at their upcoming meeting. The meeting comes after the recent reduction of bond buying by the BOJ that saw the 10yr-25yr maturities reduce to JPY 190bln from JPY 200bln, as well as the 25yr+ maturities being cut to JPY 80bln from JPY 90bln. However, they are likely to maintain their bond-buying program as stated in their recent comments that stated that the market overreacted to the change in Rinban operations, which wasn’t meant to signal any broader policy shift. The attention is expected to fall on BOJ Kuroda’s press conference. It is worth noting that in his recent speech, he stuck to the usual rhetoric of maintaining current policy, although some noted the absence of reference to ‘powerful easing.’

Governor Kuroda’s press conference is expected to be slightly dovish and the BOJ maintaining their bond-buying program and negative interest rates is expected to weaken the Yen.

See Economic Calendar for more details

Weekly Forex Outlook of USD/CAD

Forex Outlook: 

As expected, the Bank of Canada hiked rates by 25bps to 1.25% from 1.00%. however, the Canadian dollar weakened as the BOC decision was perceived as a Dovish rate hike. BoC expressed concerns about wages and the risk of stalling the expansion by raising rates too quickly and stated that the uncertainty about the future of NAFTA is weighing increasingly on the outlook. It was also noted that it will remain cautious in considering future policy adjustments and will be data dependent. BOC Governor Poloz said a rate hike today would justify what they’ve seen in the market and while he can’t say how much accommodation is needed the economy is likely to warrant higher rates over time according to the policy statement

US Oil: In the previous week, WTI fell around 1.5%, the largest such loss since early December due to a rebound in U.S. production. While the EIA reported a drawdown in stocks, the weekly crude production rose by +2.72% to 9.75mln barrels per day. The IEA stated that it expects U.S. output levels to soon exceed 10 million barrels per day. The OPEC’s monthly oil market report said that the non-OPEC supply will increase by 160K barrels to 1.15 million barrels per day. In the week ahead, weekly information on U.S. stockpiles of crude on Tuesday and Wednesday is expected to provide fresh impetus.

  • BOC Interest Rate Decision, Monetary Policy Report and Press Conference (Wednesday): The recent BOC Business Outlook Survey saw the headline fall to 8.0 from 19.0 prior, but the details of the survey were upbeat. Also, the recent economic data from Canada has been strong with the labor market report, inflation report and retail sales have all beaten expectations. Inflation continues to move higher, with the average of the 3 core measures at 1.7% as of November. The recent NAFTA uncertainty resulted in the odds of a rate hike fall back to just above 50%, before rising back up to 85%. US President Trump is not expected to take a decision on leaving NAFTA until after Mexico’s summer election and Canada PM Justin Trudeau said that his Liberal government’s pro-active approach to renegotiating the trade pact is yielding positive results. We expect the BOC to hike rate by 0.25bps to 1.25% as the recent strength in labor market and a strong Canadian economy is expected to outweigh NAFTA tensions.
  • NAFTA:The sixth and penultimate round of NAFTA talks are scheduled to be held from January 23 to 29 in Montreal.
  • Retail Sales (Thursday): The prior headline came in at 1.5% M/M, while the core metric came in at 0.8%. we expect the Retail Sales to come in flat at 0% (Consensus: -0.1%).
  • Consumer Price Index (Friday):The previous headline CPI stood at 2.1% Y/Y with the average of the BoC’s 3 core measures was at just over 1.7% we expect the CPI to come in at 0.2% M/M.

In the week ahead, the prospects for the NAFTA talks are unclear. US President Trump has recently referred to the trade pact as “a joke” after stating that “he may terminate the NAFTA agreement,” although he did note that “a lot of people would be unhappy” if he did. The BoC also has sounded more cautious over NAFTA risks.

See Economic Calendar for more details

Weekly Forex Outlook of GBP/USD

Forex Outlook:

After reports stating that the Spanish and Dutch have thrown their support behind a softer Brexit, in the previous week, the EU withdrawal bill passed the Commons by 324 votes to 295. This bill is designed to transfer EU law into UK law and was the first of at least nine Brexit-related bills set to be passed by the government. However, the data release from the UK was weak with the consumer price growth slowing down to 2.5% Y/Y and the retail sales data fell to -1.5% for the month of December, its largest fall in 7 months. But the weakness in the Dollar Index saw the pair breach the 1.39 level for the first time since the Brexit vote in 2016.

  • Claimant Count Change, Unemployment Rate & Average Earnings (Wednesday): UK is expected to release its latest labor market report on Wednesday. The claimant count is expected to moderate to 3.2k against the previous release of 5.9k and the rate of unemployment is expected to remain unchanged at 4.3%. The critical data point from the labor report is the wage data with the Average Earnings including Bonus for the month of December expected to come in at of 2.5%.

UK GDP (Q4) (Friday): As per the prediction model, We expect the UK Q3 GDP reading to be unrevised for Q/Q at 0.4%. It is worth noting that the December reading released by NIESR on UK’s GDP showed an increase of 0.6%.

Weekly Forex Outlook of AUD/USD

Forex Outlook:

It was expected that the labor market report to slow down for the month of December and Chinese growth was also expected to slow down in the last 3 months of the year.

However, the employment report for Australia saw the employment change come in better than expectations at 34.7k vs. 15.0K. The Australian Unemployment Rate unexpectedly increased to 5.5% from 5.4%, but the monthly trend full-time employment increased for the 14th straight month, suggesting the Australian job growth continued at a healthy pace. Also, the China GDP and Industrial Production beat estimates, and with China being a major trading partner for Australia, the Chinese reports were supportive of the Australian dollar.

In the week ahead, there are no major Australian economic reports scheduled for release and the pair is expected to be driven by the Dollar Index. Also, the markets will experience lower liquidity on Friday as the country observes Australia Day.

See Economic Calendar for more details

Weekly Forex Outlook of USD/CHF

Forex Outlook: 

The previous weeks’ stronger than expected US inflation and consumer spending reports were expected to have no impact on the Federal Reserve’s decision later this month. The January Fed meeting will be Janet Yellen’s last, so no changes were expected to the FOMC statement. With last Monday being a holiday in the U.S. and with no major US economic reports on the calendar in the previous week, the pair was expected to remain under pressure due to the US government shutdown deadline.

With no tier one data released from the US in the previous week, the focus fell on the US government shutdown deadline of January 19th, which kept the investors out of the US Dollar and saw safe havens like Swiss Franc strengthen. As the deadline approached, the House managed to pass a stopgap bill to fund government through to February 16th, however the bill to fund the federal government for the coming weeks did not receive the required 60 votes by the deadline of midnight on Friday as a gap remained between the Republicans and Democrats in the Senate over DACA, putting an obstacle in the way of any deal to keep the government open. Also, reports suggesting that former Trump strategist Steve Bannon being subpoenaed by special counselor Mueller further added to the pressure on the pair.

 

World Economic Forum – Davos: The annual World Economic Forum in Davos will take place between Tuesday 23rd and Friday 26th January. Headline guests this year include US President Donald Trump, Indian PM Narendra Modi, French President Emmanuel Macron, UK PM Theresa May and Italian Premier Paolo Gentiloni. BoE Governor Mark Carney will also be in attendance.

See Economic Calendar for more details

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Previous Forex Outlook:

Weekly Forex Outlook (January 8th – January 12th, 2018)

Weekly Forex Outlook (December 18th – December 22nd, 2017)

Weekly Forex Outlook (December 4-8, 2017)

Forex Weekly Outlook (Nov 27th – Dec 1st)

Forex week ahead November 20 – November 24

Weekly Forex Outlook (October 30- November 03, 2017)

Weekly Forex Outlook (October 23-27, 2017)

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