FX Majors Weekly Outlook (16-20 January) | Forexlive

UPCOMING
EVENTS:

Wednesday:
BoJ Policy Announcement, US Retail Sales, US PPI, US NAHB.

Thursday: US
Jobless Claims, Fed’s Brainard.

Last week
didn’t offer much in terms of surprises as the Fed
Chair Powell didn’t touch on monetary policy or on the latest set of data
and the US
CPI was basically bang on expectations.

What keeps
on beating expectations is the labour market data. The US
Jobless Claims keep on showing strength and that’s something that won’t
give the Fed much confidence in stopping with their rate hikes plan. Given
the recent developments in inflation though, the Fed is expected to deliver a
25 bps hike in February.

The market
keeps on showing a positive mood despite the latest
PMI data. This looks like a “Suckers Rally”. It may be a combination
of falling inflation with a resilient labour market and China reopening, with
the latter possibly being a negative if it raises inflationary pressures via
commodities.

Even if the
Fed downshifted to a 25 bps rate hike pace, it will still hike by another 50/75
bps bringing the terminal rate to 5%. The 2 year Treasury
yields rarely trade below the Fed Funds rate, and when it does so it’s because
the market expects rate cuts soon.

These rate
cuts may come and be bigger than expected because the Fed, despite the big
weakening in leading indicators, hikes till their projected terminal rate in
the 5% region and stays there for too long because the labour market doesn’t
show meaningful cracks.

They
projected 4.6% in unemployment rate in 2023 with a terminal rate of 5.1%. They
may very well stay at 5% until the unemployment rate converges with their
projections, but in that case, it will be too late as the recession will deepen.

Wednesday: The BoJ is
expected to keep its policy unchanged with the rate remaining at -0.10% and the
YCC to flexibly target 10yr JGB yields at 0%. There is though a risk of a
hawkish surprise given the recent developments in Japan. First of all, the
BoJ surprised
in December by increasing their YCC band to +/- 50% from the previous
+/-25%. That caused a huge bid in the JPY.

Then we got
reports of a possible adjustment to Abe-era deflation fighting mandate.
Finally, persistent reports of BoJ boosting its inflation forecasts at the
meeting and a review of the side effects of its easing. In the chart below you
can see the major catalysts that led the USD/JPY pair to fall by more than 1900
pips.

US Retail
Sales are expected to show again another decline with the Control Group
seen at -0.2% and the headline number at -0.8%. High inflation, rising interest
rates and recession fears are all big headwinds for the consumer and the worse
is yet to come.

US PPI is
expected to show another decline across the board with the headline Y/Y
number coming at 6.8% from the prior 7.4% and the M/M reading seen at -0.1%
from the prior 0.3%. The Core Y/Y number is seen at 5.9% from the prior 6.2%
and the M/M reading is expected at 0.1% from the prior 0.4%. Inflation has
clearly peaked and the market knows that, but there’s too much complacency on
the growth side in my opinion with leading indicators pointing to a bad
recession.

The US NAHB
is expected to remain unchanged at 31. It’s been falling like a rock since
January 2022 as one of the fastest monetary policy tightening impacted heavily
the US housing market. This trend is set to continue and it’s very likely
that the 2020 trough will be breached soon.

Thursday: US Jobless
Claims are seen at 212K and Continuing Jobless Claims at 1655K. As mentioned at
the beginning of the year, the labour market data should now be more
important for the market than the inflation data. The Fed wants to see a
higher unemployment rate, so it won’t ease if the labour market keeps showing
strength. Maybe the next big risk off wave will start only when we’ll see
weakness in jobless claims or NFP data.

This article
was written by Giuseppe Dellamotta.