Week ahead: US January CPI rates and Powell to shake the markets

The week is drawing to a close, yet the US employment report for January is still to be released and could alter the picture of the markets. Yet let’s have a look at what the calendar has in store for the market in the coming week. On Monday we get Japan’s Current Account balance for December and Norway’s CPI rates for January and GDP rates for Q4. On Tuesday we get Australia’s consumer confidence for February and Business indicators for January as well as Canada’s December Building Permits. On Wednesday we highlight the release of the CPI rates for January and Fed Chairman Powell’s testimony before the US Congress. Tomorrow we get Japan’s corporate goods price rates for January, UK’s GDP rates for Q4, Switzerland’s CPI rates for January and from the US the weekly initial jobless claims figure and the PPI rates for January. On Friday we get Euro Zone’s revised GDP rate for Q4, the US retail sales for January, Canada’s December manufacturing sales and the US industrial output for January.

USD – January’s US CPI rates and Fed Chairman Powell’s testimony to shake the greenback

On a monetary level we highlight the testimony of Fed Chairman Powell before Congress on Wednesday. We note the Fed’s doubts for more rate cuts to come, yet at the same time, we note that currently, according to Fed Fund Futures, expects another two rate cuts until the end of the year. Should the Fed Chairman actually maintain a hawkish tone, he may force the market to reposition itself by lowering its expectations and thus supporting the greenback.    

On a macroeconomic level, we note that the US employment report for January is still to be released and could alter the USD’s direction. In the coming week, on a hot Wednesday the US CPI rates for January are to be released. Should the rates show a resilience of inflationary pressures in the US economy, the release may ease the markets expectations for the Fed’s rate cutting path thus supporting the USD. Also on Friday we get the US retail sales growth rate for January and a possible acceleration could also provide some support for the greenback.

On a fundamental level, after Trump postponing imposing tariffs on US imports from Canada and Mexico, and at the same time imposed additional tariffs on Chinese imports. The Chinese replied practically immediately, by imposing 15% for U.S. coal and LNG and 10% for crude oil, farm equipment and some autos and starting an antimonopoly investigation in Alphabet’s Google, as well as including in its “unreliable entities list” some US companies. China is also imposing export controls over some rare earths and metals that are critical for hi-tech gadgets and the clean energy transition. The issue was of high impact and rattled the markets. Yet market worries for a possible trade war over the week tended to ease weakening the USD. 

Analyst’s opinion (USD)

“We expect the USD to be supported in the coming week should the US CPI rates accelerate and Fed Chairman maintain a hawkish tone. Also we cannot exclude the possibility of Trump causing mayhem in the markets, which could create some safe haven inflows for the USD. ”

GBP – Zooming on UK’s Q4 GDP rates

Yesterday’s BoE rate cut was a market mover for pound pairs, as it drove the pound notably lower across the board.  The bank as was widely expected cut rates by 25 basis points lowering rates to 4.5%. The bank cited progress in reducing inflationary pressures allowing the bank to cut interest rates again. The bank expressed a predisposition towards further easing yet avoided committing to any particular rate cutting path, signaling a “gradual and careful approach”. Yet what impressed us, was the vote count as all nine members of the Monetary Policy Committee (MPC) were in favor of a rate cut. The dissents were regarding the extent of the rate cut as two policymakers, Swati Dhingra and Catherine Mann favoured a double rate cut. Overall, we expect the bank’s intentions to weigh on the pound on a monetary policy level.

The name of the game in the UK economy seems to shifting increasingly towards growth, hence we highlight in the coming week the release of the preliminary GDP rate for Q4 on Thursday. The rates for Q3 were at stagnation levels quarter on quarter and should the rates retreat further entering negative levels and implying a shrinking of the UK economy in the last quarter the release could weigh on the pound. On the flip side a possible acceleration of the rates could provide substantial support for the pound as it would provide a breather from the ghost of a recession for the UK economy.

Analyst’s opinion (GBP)

“We expect BoE’s decision to continue weighing on the pound on a fundamental level, as the monetary policy outlook expectations may diverge further if compared with the Fed’s. Some support for the pound could be achieved should the UK GDP rates for Q4 accelerate easing market worries”

JPY – Monetary policy to guide the Yen

JPY is about to end the week in the greens as it strengthened across the board. The main driver of JPY’s strengthening may have been market expectations for  BoJ’s monetary policy intentions. Comments by BoJ board member Naoki Tamura, stating that BoJ must raise rates to at least 1%, a statement deemed as hawkish as market consensus currently, is for the bank to raise rates to 0.75% by the end of the year, as per JPY OIS. Overall, we see the case for BoJ’s intentions to be possibly the key factor behind JPY’s direction and if the market’s expectations for the bank to hike rates at a faster pace than initially expected, are enhanced, we may see JPY getting further support over the coming days.

On a fundamental level, we note JPY’s safe haven qualities as a possible market mover. Should we see market worries about a possible trade war easing further we may see JPY losing some ground and vice versa. Also we note the easing of carry trade with the Yen on the short side as interest rate differentials between the Fed and BoJ tend to narrow, given the market’s expectations for a more hawkish BoJ. Yet should that impression be reversed we may see JPY getting under pressure again.

Lastly on a macroeconomic level, despite macros not being usually major movers for JPY, we note the acceleration of the earnings growth rates, which tended to enhance the market’s expectations for BoJ to be more hawkish last Wednesday. For the coming week we note the release of the current account balance for December on Monday and the PPI rates for January on Thursday as possible points of interest for the Japanese economy.  

   

Analyst’s opinion (JPY)

“Monetary policy and BoJ’s intentions continued to be key in regards to the Yen’s direction in the past week. Should market expectations for the bank’s rate hike path intensify over the coming week, we may see JPY getting some support. Also the possible effects from JPY’s safe haven qualities and the carry trade should not be underestimated.”

EUR – The name of the game in the Euro Zone is growth

On a monetary level, we note ECB’s intentions to cut rates further and Trump’s intentions to impose tariffs on Euro Zone products could act as an accelerator for the bank’s rate cutting path. For the time being the market seems to expect the bank to deliver another three rate cuts in its following consecutive meetings until June. Overall any signals by the bank verifying or even enhancing the market’s expectations could weigh on the EUR. On the flip side inflation in the Zone may not be easing as planned by the bank which could force it to ease on its rate cutting path and such a scenario to provide support for the common currency.  

On a macroeconomic level, we note in the coming week the release of Germany’s final HICP rate for January and expect it to verify that the rate remained unchanged if compared to the December rate at 2.8% yy. Such a reading could provide some support for the EUR, yet the name of the game in the Euro Zone is growth and hence we highlight the release of the revised GDP rate for Q4, which is expected to remain at stagnation levels, and if so or if it even shows a contraction, we may see the common currency retreating as the worries for a possible recession in the Euro Zone could intensify.

On a fundamental level, we note the survival of the French government at a no confidence vote and the subsequent approval of the budget, yet the news provided little certainty for the political outlook of the France and the Zone as a whole. The uncertainty deepens given that Germany is facing an election near the end of the month and the overall situation tends to weigh on the EUR. Also we highlight the intentions of US President Trump to impose tariffs on European products imported in the US. Diplomatic efforts are being made by the EU to avert a possible US-EU trade war and potential positive results could provide asymmetric support for the EUR, yet we have little hope for such a scenario to materialise. Thus we expect the issue to weigh on the common currency as long as the threats are maintained.  

Analyst’s opinion (EUR)

“In the coming week, we may see the release of Euro Zones’ revised GDP rates gaining some interest other than that, we expect fundamentals to lead the common currency. Both the monetary policy outlook and the fundamental circumstances surrounding the common currency tend to weaken it at the current stage”

AUD – Fundamentals to lead the Aussie

On a monetary level, we note that RBA’s interest rate decision on the 18th of February is nearing and market interest is heightening on whether the bank will be cutting rates or remaining on hold. The easing of inflationary pressures for Q4 24, tended to intensify market expectations for the bank to ease its restrictive monetary policy in the February meeting and currently AUD OIS imply a probability of 84% for the bank to deliver a 25 basis points rate cut. On the other hand, we still have some doubts about RBA cutting rates. Should we see any signals enhancing the possibility of a rate cut in the bank’s next meeting we may see the Aussie losing ground and vice versa.   

On a fundamental level, we highlight the easing of market worries for a possible trade war between the US and China, or at least pricing in the imposition of additional US tariffs on imports of Chinese products and the Chinese retaliatory measures. The easing of market worries may allow the Aussie on a fundamental level to take a breather, given the close Sino-Australian economic ties. It’s characteristic how the Aussie was supported against the USD after the tariffs were imposed by the US government. Overall the issue tends to be dominating the course of the Aussie and should we see frictions in the US-Sino relationships intensifying we may see them weighing on the AUD. Also any signs of a possible deterioration of the Chinese economy could weigh on AUD and to that end we would note the release of Chinas’ inflation measures for January tomorrow. Any deflationary signals would not be good news for CNH and AUD and  

On a macroeconomic level the calendar for Aussie traders is expected to be rather light in the coming week, yet we do note the release of NAB’s business indicators for January and Februarys’ consumer confidence as possible points of interest. A possible improvement of the situation on the ground for the Australian economy as well as an improvement of its outlook could provide some support for AUD. The same applies should consumer adopt a more optimistic outlook. 

Analyst’s opinion (AUD)  

“We expect fundamentals to lead the Aussie in the coming week, especially any news from China and its relationships with the US. On a monetary level, should market expectations for RBA to cut rates on the 18th of February intensify, we may see the Aussie retreating”

CAD – Trump’s tariff threats hanging over the Loonie like an axe

On a fundamental leve, Loonie traders were relieved on Monday as the US postponed applying tariffs on US imports from Canada for thirty days. Yet Trump’s threat seems to continue to hang over the Loonie like an axe and any indication that the US may proceed and apply the tariffs tend to weigh on the CAD and vice versa. Despite the postponement, the issue as such tended to undermine investor’s confidence on the outlook of the Canadian economy increasing uncertainty. We also note the drop of oil prices could be another factor that may weigh on the Loonie, given Canada’s status as a major oil producing ecnonomy. WTI prices have reached levels not seen since the end of last year and should they continue falling, we may see them having a bearish effect on the Loonie as well.

One monetary level we note the market’s dovish expectations for BoC’s intentions. Currently CAD OIS imply that the marekt expects the bank to continue cutting rzates in tis next meeting and proceed with anoyther two rate cuts until the end of the year. It’s characteristic that reuters reported that Bank of Canada Governor, Tiff Macklem, stated yesterday that a policy shift in the U.S. was causing uncertainty and President Donald Trump's tariff threats were already impacting businesses and households. We see the case for the bank to remain dovish and should the markets’ expectations for a dovish BoC intensify over the coming week, we may see the Loonie being on the retreat. Please note that Canada’s employment data for January are still to be released as these lines are written depending on the actual rates and figures, it could alter the Loonies’ direction as a looser employment market may also deepen the dovishness of BoC and weigh on the Loonie and vice versa.

On a macroeconomic level, we note the reversal of Canada’s November trade deficit into a surplus in December, in a sing of increased wealth entering the Canadian economy despite the drop of oil prices over the past month. In the coming week we have light calendar regarding financial data to be released and expect fundamentals to be leading the way for the Loonie.

Analyst’s opinion (CAD)

“We expect the Loonie’s direction over the coming week to be decided primarily by fundamentals and in particular the market’s expectations for BoC’s stance and the possibility of the US applying tariffs on imports from Canada. Overall we tend to see some bearish predisposition for the CAD dominating.”    

General comment

As a general comment in the FX market we expect the USD to maintain the initiative in the FX market over other currencies especially on Wednesday as we get high impact financial releases and Fed Chairman Powell’s testimony. Please note that the prementioned events may have ripple effects also on US stockmarkets and gold’s price. As for US stockmarkets we note a relative indecisiveness to advance higher reaching new record highs. Yet the earnings season is still on and a number of companies could be reaching the headlines. Gold on the other hand has reached new record highs and fundamentals still tend to favor it.