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Weekly look-ahead

By David Morrison  |  26/01/2018 15:16

This article looks at key market events over the coming week


US inflation update

The week kicks off with the release of the US Core PCE Price Index on Monday afternoon. This is the Fed’s preferred inflation measure and is potentially market-moving. It peaked at an annualised rate of +1.8% just under a year ago but proceeded to fall sharply to +1.3% in August. It has crept higher since then coming in at +1.5% last month – still well short of the Fed’s 2% target but heading in the right direction. If it were to pick up to 1.6% or higher this could help to steady the dollar’s decline as it would boost expectations of a faster rate of monetary tightening from the US central bank.

Fed meeting

On Wednesday we have a monetary policy meeting from the Federal Reserve. The Fed isn’t expected to announce any changes to its fed funds rate but as always the accompanying statement will be of interest. Now the Fed doesn’t generally comment on currency moves as these are outside its official mandate. However, market expectations of future rate moves are closely tied to bond yields and FX. Here we have a central bank raising rates yet seeing a weaker currency and looser financial conditions. It’s possible there may be some reference to this in the statement.

State of the Union address

In the early hours of Wednesday morning President Trump will deliver his first State of the Union address. However, this is unlikely to be market-moving given that Mr Trump delivered a speech concerning the US and global economy in Davos last Friday. Unsurprisingly, the president took ownership of the soaring stock market citing the significance of his cuts in tax and regulation. Pointedly, he emphasised the US’s commitment to free trade as long as this was “fair and reciprocal” highlighting the “unfair economic practices”, “intellectual property theft” and “state-led economic planning” of other countries (China perhaps?). His speech did nothing to hold back the rally in US stock indices.

Payroll update

The latest update on US Non-Farm Payrolls comes out on Friday. The consensus expectation is that payrolls will bounce back after last month’s disappointment. But yet again, it’s doubtful if another weak number will do any significant damage to the rally. But investors should keep a close eye on US Treasury yields. The 10-year continues to dig in above 2.6% and if this rises further towards 2.7% then we may see investors start to dial back their exposure to risk assets in general and equities in particular.
Key events

Monday -              US Core PCE, Consumer Spending, Consumer Income
Tuesday -             French, Spanish, Euro zone Flash GDPs; German Preliminary CPI; UK Net Lending; US Consumer Confidence; Bank of Japan Summary of Opinions
Wednesday -        President Trump – State of the Nation Address; Australian CPI; Chinese Manufacturing/Non-Manufacturing PMIs; German/Euro zone Flash CPI; US ADP                                        Employment Change, Chicago PMI, Pending Home Sales, Crude Oil Inventories, FOMC Statement   
Thursday -            Manufacturing PMIs – Japan, China, Spain, Switzerland, Italy, France, Germany, Euro zone, UK and US
Friday -                 UK Construction PMI; US Non-Farm Payrolls, Unemployment Rate, Average Hourly Earnings, Factory Orders, Consumer Sentiment, Inflation Expectations.

US corporate earnings include Alphabet, Amazon, Boeing, Exxon Mobil, Facebook, Ford, McDonald’s, Merck, Microsoft, PayPal, Pfizer and Pulte Group.

Stock indices

US indices at record highs

US stock indices continued their relentless move higher last week with the majors notching up a clutch of fresh record closes. But the performance of the Europeans was patchier. The UK’s FTSE100 and the German DAX lost ground due to the strength of sterling and the euro respectively. In just the same way that the weaker dollar is helping to make US corporations more competitive in the global market, the sharp rallies in the single currency and the British pound look set to weigh on overseas sales and earnings for these two countries going forward. It’s also noticeable that the Japanese Nikkei pulled back sharply from the 26-year highs made recently with the sell-off accelerating once the USDJPY broke below 110.00 in the early part of last week.

Dollar weakness

So investors are keeping a close eye on currency moves, particularly in the light of comments made last week by US Treasury Secretary Steve Mnuchin. Speaking at the World Economic Forum in Davos Mr Mnuchin made a break with convention and spoke with candour about ongoing dollar weakness. Mr Mnuchin pointed out the obvious when he said that dollar weakness “is good for us (the US) as it relates to trade and opportunities.” He went on to insist that ultimately the dollar would strengthen as a reflection of US economic strength and as it continued to be the world’s reserve currency. His words saw the EURUSD spike to a fresh three-year high. Later that day ECB President Mario Draghi gave a press conference in which he declined to “talk down” the single currency. This helped the EURUSD briefly break above 1.2500.


EURUSD above 1.2500

Last week the EURUSD broke above 1.2500 to hit its highest level in over three years. The pair also posted its sixth consecutive week-on-week gain – a run last achieved in the first quarter of 2014. The latest move means that the euro has rallied over 20% against the dollar in just over a year with around 7% of the gains coming since mid-December. The move has been mirrored in the Dollar Index which is hardly surprising given the 57.6% weighting of the euro in the currency basket. Last week the Index slumped below support at 90.00 and broke 89.00 to hit its lowest level since December 2014. Chart-wise, we have to go back a few years to find any obvious support: the area around 88.00 worked as resistance in 2008/2009 and then again in the summer of 2010. So this is the level to watch this week, either for an overdue bounce or for a break and a continuation of the downside move.
Sterling rallies
The fall of the dollar has led to some other significant currency moves. Sterling continues to push higher and last week it traded back at levels seen in early 2016, before the UK referendum on EU membership. In addition, the GBPUSD is now trading above the double bottom hit in the first quarter of 2009 at the height of the financial crisis. Last week’s rally suggests that traders and investors are comfortable in pushing the pound higher. However, the move since the beginning of this year looks overextended and a period of consolidation is overdue. A quick glance at the EURGBP chart helps illustrate the fact that it is dollar weakness which is the main driver of cable’s surge higher. Sterling has made decent gains versus the euro over the last ten days and yesterday the EURGBP broke below support around 0.8750. But the euro turned sharply higher once the pair touched 0.8700 and the current wave of positive euro sentiment will have to evaporate for sterling to make more significant gains.

USDJPY still in a range

The Japanese yen is another significant global currency to benefit from the dollar’s weakness. Last week the USDJPY scythed through support at 111.00 and then 110.00. Yet despite this the pair remains range bound with the upper end at 114.00 and support around 108.00. Investors will be keeping a close eye on this latter level as a break below here opens up the possibility of a move back towards 100.00.


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