Key Events This Week: January 25th – 30th:
Tuesday: GBP Gross Domestic Product USD Consumer Confidence
Wednesday: AUD Consumer Price Index USD FOMC Rate Decision
Thursday: EUR German unemployment Change German Consumer Price Index JPY National Consumer Price Index
Friday: EUR Eurozone Unemployment, Consumer Price Index CAD Gross Domestic Product
Markets continue to look for USD out performance. The upcoming FOMC meeting is unlikely to contain any major surprises, but it will be interesting to contrast the Fed’s tone with that of central banks elsewhere, which have on the whole surprised on the dovish side in 2015.
Draghi delivered an asset purchases programme and gave all the details. This has caused EUR/USD to head lower and we expect this to continue as the ECB’s balance sheet is expanded towards the €3 trillion mark. In addition, should inflation not increase towards the 2% ECB targets then the ECB will continue its purchase program. The results of the Greek election will likely be a source of some volatility at the Asian open Sunday.
While other central banks in both G10 and EM have surprised on the dovish side recently, the BOJ remained firmly on hold at its latest meeting. While the 2015 inflation forecast was revised to 1.0%, well below the central bank’s target, the 2016 forecast was actually revised upwards.
Increased disinflationary pressure, with risks of now heading into deflation as highlighted by the BOE’s Carney. In addition, the two members of the BOE who were previously voting for a rate hike now want to keep rates on hold. This on top of political pressure in the coming months should keep the downward momentum on GBP/USD.
The upcoming CPI print poses a risk for AUD, given lowflationary prints elsewhere and the recent slew of dovish surprises from central banks. While iron ore prices have stabilized somewhat, copper prices have weakened significantly since the start of the year, markets expect AUD could weaken as a result. While expectations of easing in China could offer AUD some support, market looks to sell rallies.
CAD could continue to weaken following the surprise BOC rate cut. Markets don’t see the output gap closing until 2017 at the earliest, the BOC sees it still closing at the end of 2016. Indeed, the BOC does say that if oil prices stay at these levels, the output gap is set to widen further.