Weekly Market Outlook – Markets are trading cautiously ahead of this week’s FOMC statement, likely to be hawkish and suggest interest rate increases in March. The Australian Bureau of Statistics is releasing the CPI for the December quarter on Tuesday, and it is expected to increase by 1%. Moreover, the Bank of Canada (BOC) will also conclude its monetary policy meeting this Wednesday.
EUR: January PMI Data for the Eurozone
PMIs for January will be released for the Eurozone, Germany, and France this week. As the continent fights both Omicron and higher energy prices, it is expected to suffer some declines.
Germany’s cost of living is already soaring out of control – a survey by Munich’s Ifo Institute suggests more price hikes are in the pipeline. The German Ifo provides further insight into German business sentiment. Furthermore, the ECB has remained steadfast in its belief that it does not need to follow the Fed with higher interest rates this year.
Geopolitical risk premiums are hard to see priced into the EUR yet. The risks would be far worse for European growth projects, including aggressive sanctions against Russia – plus the spike in energy costs would negatively impact the euro via the Terms of Trade channel.
AUD: Higher Inflation
The consumer price index (CPI) for the December quarter is due to be released by the Australian Bureau of Statistics on Tuesday.
Following an unexpected rapid drop in the unemployment rate just days ago, this week’s inflation figures are likely to fuel speculation of an interest rate rise this year by the Reserve Bank of Australia. The CPI is expected to rise by 1% in the past quarter, most likely due to higher petrol prices and the cost of new housing.
We are likely to see another increase in inflation in 4Q this week. Despite not being very high, it could still fuel hawkish speculation on the RBA and support the AUD, even though we doubt RBA tightening is a story for the first three quarters of 2022. It is also possible that a fall in USD could help build support at 0.72 for AUD/USD.
CAD: Rate Hike is Coming
This Wednesday sees the (BoC) Bank of Canada’s first meeting of 2022 as well as the release of its Monetary Policy Report. With prices rising and bond yields going up, investors are expecting nothing but hawkish remarks from the Bank of Canada.
Canada’s tight labour market, close to 5% inflation, investments and hiring intentions at record levels, and oil prices back to pre-Omicron levels suggest the bank may raise the interest rates. As a result of the current restrictions in Ontario – which will loosen at the end of next week – it’s widely expected that the Bank of Canada will raise interest rates by 25 basis points on Wednesday.
Presently, there is a 70% implied probability of a hike, so the CAD could rise after the announcement, especially given that this should reinforce the premise that the BoC will tighten ahead of the Fed within 1-2 months. If our expectation for a hike proves to be accurate, we expect USD/CAD to drop to 1.2400/1.2450.
USD: January FOMC Meeting in Focus
The FOMC meeting on Wednesday will be the highlight of the week, as we predict the Fed will announce QE is ending prematurely and announce it will hike rates in March. Having already priced in four hikes for this year, the focus on the Fed balance sheet could cause the pricing to stall/marginally reverse and be mildly negative for the dollar. Next week will also feature a heavy slate of US tech, financial, and industrial 4Q earnings – putting pressure on US equities as bond yields rise.
Data-wise, we’ll be getting our first glimpse of US 4Q21 GDP data – estimated near 5% quarterly after soft December figures. On Friday, we will get the 4Q Employment Cost Index. The dollar could also end the week on a stronger footing if the employment cost report exceeds consensus figures, which would indicate that second-round inflation effects were emerging in the labour market.
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