Week Ahead
 | 28/01/2019

Weekly outlook: January 28th to February 1st | FOMC interest rate decision, Brexit, NFP and US-Sino trade negotiations to keep the markets on the edge of their seats.

Entering the new week, with the partial US government reopened at least for now, the FOMC interest rate decision on Wednesday has already started to affect the USD’s direction. Also the US-Sino trade negotiations on Wednesday and Thursday could affect the greenback’s direction. Last but not least, the release of January’s US employment report, with its NFP figure could get the market’s attention on Friday. Also the UK parliament’s vote on Theresa May’ revised Brexit plan is expected to move the pound substantially on Tuesday.

USD – FOMC Interest rate decision and US employment report to affect the USD’s direction.

With the US government shutdown marking its end on Friday, the markets turn their attention to the FOMC interest rate decision on Wednesday. The bank is widely expected to remain on hold at +2.5% and currently Fed’s Funds Futures imply a probability of 99% for such a scenario. We see the case for the bank to remain on hold and include some dovish comments as a number of Fed officials during the past month had pointed to dovish risks ahead. Also of special importance could be any comments about the bank’s intentions for its balance sheet. Should the bank end or slowdown its balance sheet normalization process, we could see the USD weakening as the markets may not have priced in such a scenario yet. Also, the US-Sino trade negotiations starting on Wednesday, could affect the USD’s direction. Lower Chinese officials are to land in the US on Monday in order to set the way ahead of the trade negotiations in Washington, and market participants will be keeping an eye out for any hints of further progress. Chinese Vice Premier Liu He who is regarded as a top economic advisor for Chinese President Xi Jinping, will be meeting with Robert Lighthizer, the U.S. Trade Representative and Treasury Secretary Steven Mnuchin on Wednesday and Thursday. Should there be no deal by the March deadline, the U.S. could raise further tariffs on Chinese imports to 25% from current 10% on a wide range of products. On the financial releases front, definitely for the USD, the star of the week is to be the US employment report for January, which is due out on Friday. The average earnings growth rate and unemployment rate are expected to remain unchanged if compared to December’s report, at +3.2% yoy and 3.9% respectively. The notable change expected is the drop of the NFP figure, which is expected to reach as low as 160k if compared to December’s reading of 312k. We could see the drop of the NFP figure blurring the picture of the otherwise tight US labor market and in that sense weaken the USD. Also of special importance is if there is going to be a preexisting bearish sentiment for the greenback which could enhance the effect of the dropping NFP figure. It should be noted that release of the preliminary US GDP growth rate (on an annualized basis) for Q4, could also add to the bearish sentiment as it is expected to slow-down and reach +2.5% qoq, if compared to Q3’s final rate of +3.4% qoq.

GBP- UK Parliament’s vote on Brexit along with UK’s manufacturing PMI set the tone for the GBP.

With 61 days to go for the UK exiting the EU, Brexit developments are getting more and more intense. On Tuesday, the UK parliament is expected to vote on Theresa May’s revised Brexit plan. A number of amendments have been tabled and could substantially alter the course of Brexit, including a possible extension of article 50, asking the PM to scrap the Irish backstop or at least make it time limited, ruling out a no deal Brexit, giving parliament support of the procedure or even a new referendum. It is clear the Tuesday’s vote will be another crossroad for the UK in regards to Brexit and whatever the outcome, it could affect the pound substantially. We see the case for the UK parliament to move towards an agreed Brexit and a result indicating such tendencies could provide some support for the GBP. On the financial releases front, the release of UK manufacturing PMI for January, could provide some volatility for the pound on Friday. The indicator’s reading is expected to drop reaching 53.5, if compared to December’s reading of 54.2. Should the actual reading drop as forecasted, we could see the pound weakening as it could be indicative of a slow-down in economic activity for UK’s manufacturing sector.

EUR- Inflation and growth rates to dominate EUR’s direction.

Fundamentally the common currency’s direction could be affected by any developments on Brexit as well as the dovishness of ECB officials. However the main interest of EUR traders could be on the financial releases this week, as a number of important releases are due out. Starting with January’s preliminary releases of the HICP rates for Germany (Wednesday, Forecast: +1.7% yoy vs. December: +1.7% yoy), France (Thursday, Forecast: +1.4% yoy vs. December: +1.9% yoy) and the Eurozone as a whole (Friday, Forecast: +1.4%yoy vs. December: +1.6%yoy), the EUR could weaken as the actual inflation rate moves further and further away from ECB’s target of +2.00% yoy. The same would apply for the release of the preliminary GDP growth rates for Q4 for France (Wednesday, Forecast: +0.2% qoq vs. Q3:+0.3% qoq) and the Eurozone (Thursday, Forecast:+1.2%yoy vs. December:+1.6% yoy) as the slowdown of the growth rate would strengthen arguments for an even steeper slowdown of Eurozone’s GDP growth rate in the near future. Overall we remain bearish for the common currency as the financial releases relating to it, throughout the week could enhance the bearish sentiment.

AUD – US-Sino negotiations, Chinese data and CPI rate to be closely watched by Aussie traders

The US-Sino trade negotiations are to affect substantially the Aussie as the Australian economy, due to its large exposure to China, is highly sensitive to any developments on the issue. Should there be positive headlines about the negotiations, throughout the week and especially on Wednesday and Thursday when Chinese Vice-Premier Liu HE will be visiting the US, we could see the Aussie gaining some ground. On the other hand the financial releases from China and Australia, aren’t expected to do any favors to the Aussie, this week. Starting on Wednesday, with the release of the Australia’s CPI rate for Q4, the rate is expected to slow-down and reach +1.7% yoy, if compared to Q3’s reading of +1.9% yoy. Should the actual reading meet its forecast, we could see the Aussie weakening as the rate distances itself further away from RBA’s inflation target and could cause a more dovish stance from the bank as inflation is on the retreat. On Thursday, we get from China the NBS manufacturing PMI for January (Forecast: 49.3 vs. December:49.4) and on Friday China’s Caixin manufacturing PMI for January (Forecast: 49.5 vs. December:49.7). The Aussie could weaken further, as the tick down of the NBS manufacturing PMI could imply further contraction, which would in turn be indirectly confirmed a drop of the Caixin manufacturing PMI, confirming the slowdown of the Chinese economy.