FX Insights 1/15-1/19

The US dollar may be poised to snap its 5 week losing streak as the Senate appears to have advanced a funding bill which would end last Friday’s government shutdown. Recent turmoil in Washington, D.C. and improving sentiment abroad have heavily weighed on the dollar but the latest progress could give the dollar some respite as political risks subside. Final readings of core inflation and GDP for Q4 headline this week’s data ahead of next week’s Fed meeting. Positive readings from the data would improve expectations for the Fed to maintain its projected rate path this year.

The euro has taken large responsibility for the dollar’s decline this year in part thanks to a shift in sentiment following bullish European Central Bank (ECB) minutes two weeks ago. The single currency enjoyed further welcomed news, last Sunday, when German Chancellor, Angela Merkel, moved past a four month political stalemate as her prospective coalition partner backed a preliminary agreement to form a government. This week sees a host of surveys out of Germany and the Eurozone but this Thursday’s ECB meeting will be the main event. Given already elevated expectations the euro could succumb to a sell-off should any comments from ECB President, Mario Draghi, deviate from the tone of the minutes.

The pound has also benefited from a reduction in political risk in the past few weeks following reports that Spain and the Netherlands were seeking a softer Brexit deal. Market focus should return to the economy this week with November labor market and Q4 GDP data released this Wednesday and Friday. Data last week showed inflation moderating in December, while retail sales for the same month missed estimates. GDP for the most recent quarter is expected to slow on an annualized basis but should earnings data miss it could present some worry for the economy given recently cooling inflation and spending.

The Bank of Canada (BoC) raised benchmark rates by 25 bps last Wednesday, but did so cautiously signaling that further hikes would likely come slowly. The Canadian dollar quickly plummeted but later retraced as BoC Governor, Stephen Poloz, subsequently delivered more upbeat remarks on the economy. While the economic conditions in Canada have been supportive of a rate hike, the uncertainty surrounding NAFTA still presents downside risks for the economy and currency. November retail sales and December inflation data released this week are forecast to show slowing in the fourth quarter.

The Bank of Japan (BoJ) meets Monday night and is expected to keep policy and guidance unchanged. Markets will be looking at the BoJ’s Outlook Report where the bank is likely to upgrade its growth forecasts for this year. However, until the central bank begins discussions of policy normalization USD/JPY will still be primarily driven by political and market risk on the dollar side.

Sources: Bloomberg, Wall Street Journal, Reuters, Barclays, Bank of America, Econoday, 4cast

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