Market Outlook for the Week of 22-27 January | Forexlive

Last week was marked by low volatility with the
market focused on U.S. data from the industrial production, constructions, and
other sectors. These data points indicate a likely economic slowdown in the
U.S. soon.

There’s hope for a soft landing from the Fed, but if
the labour market remains tight and there’s no sufficient evidence of inflation
cooling down, the bank might keep rates high for a longer time.

Another important event was the BoJ meeting where
many hoped for signals of monetary policy changes, but such decisions will now
fall to the next Governor.

Kuroda, who spent years fighting deflation, hinted
that monetary policy will remain unchanged for a longer time, but the next
Governor might have a different approach considering that inflation is running
hot in Japan — though not as high as in other developed countries.

The main events of the week ahead are:

Tuesday — PMIs for the euro area and the U.K.; the
flash services PMI and flash manufacturing PMI for the U.S.; and the CPI for
New Zealand.

Wednesday — The inflation data for Australia; the
BoC monetary policy report, rate statement, overnight rate and press conference
in Canada.

Thursday — the GDP and the new home sales in the
U.S.

Friday — the personal consumption expenditures
(PCE) price index, the Fed’s preferred inflation gauge.

There are no Fed members scheduled to speak this
week as the blackout period has started.

In the eurozone the expectation is that both the
services PMI and the manufacturing PMI will print above expectations reflecting
that the economy is less impacted than many analysts anticipated. The main
driver could be the softer than expected energy prices which have boosted
activity in several sectors.

The U.K. services PMI is likely to print in line
with analyst expectations.

The inflation data for New Zealand can provide
clues about what the RBNZ might do next in terms of monetary policy. There are
some signs that inflation will cool down, but currently remains elevated
compared to the bank’s target of 1-3%.

The BoC hiked the rate by 50bps at the last meeting
to a terminal rate of 4.50%. The consensus for this week’s meeting is a 25bps
rate hike as the Governor stressed that hiking rates excessively could push the
economy into an “unnecessary painful recession”. The inflation
remains high which means the rate hiking cycle might not be over yet, but some
analysts expect a pause after this meeting.

Inflation data for Australia is likely to print
higher than expected, so the RBA might be forced to hike by 25bps at the next
meeting in February.

The consensus for the U.S. GDP is 2.6%, which would
be softer than the previous one, but in positive territory. In a blog post from September, the Federal Reserve Bank of St.
Louis argued that the GDP might not be the right tool to gauge whether the
economy is in recession, but rather the lesser known GDI (gross domestic
income).

The GDP is a lagging indicator compared to alternative
methods like PMIs and ISMs, which have shown contractions in Q4. The GDI was
softer than the GDP in both Q2 and Q3 last year, so the U.S. economy might
already be in a recession according to analysts from Nomura.

The analyst consensus for the next FOMC meeting in
February is for a 25bps hike, but if the PCE surprises on the upside, we could
see a 50bps hike. Right now, core PCE is expected to have a 0.2% or 0.3% rise
for December m/m.

USD/CAD expectations

On the H1 chart the pair closed the week near
1.3350. A break below this level opens the path for future depreciation
targeting 1.3260, the next level of support. The Canadian dollar is also likely
to be supported by rising oil prices after China’s reopening.

On the upside, the next levels of resistance are at
1.3490 and 1.3550. A risk for this trade is the BoC meeting this week, but in
the short term the overall picture for USD/CAD is bearish.

GBP/CHF expectations

Last week, SNB
Chairman Jordan reiterated that the bank is committed to fighting
inflation which means future hikes will likely follow.

The pair closed the week near the 1.1400 level of
resistance. A correction is expected until the 1.1345 or even 1.1350 level of
support. If that level holds, the uptrend should resume targeting 1.1460.

On the downside, the next levels of support are at
1.1225 and 1.1160.

This article
was written by Gina Constantin.