Market Outlook for the Week of 16-20 January | Forexlive

Last week was a quiet one as it usually happens
after the NFP. The focus was on the U.S. CPI as everyone wanted to know if
inflation is cooling down. The data showed some relief year-over-year, but
inflation remains high, so the fight is not over yet. The market now expects a
25 bps rate hike at the next FOMC meeting.

On Tuesday, we’ll get the labour market data for
the U.K and inflation data for Canada which can provide clues about future rate
hikes. In the U.S. we’ll have the empire state manufacturing index release.

The BoJ outlook report, monetary policy statement
and the policy rate are expected Wednesday in Japan followed by the BoJ Press
conference. Later that day, we’ll get the U.S. PPI, retail sales and industrial
production data.

In Australia the employment change and unemployment
rate will be published Thursday; while in the U.S. the building permits and
housing starts data is expected.

On Friday, SNB Chairman Jordan will speak in a
panel discussion titled “What Next for Monetary Policy?” at the World
Economic Forum. ECB President Lagarde is also scheduled to speak at Davos in a
panel titled “Global Economic Outlook: Is this the End of an Era?”.
Some Fed members will also deliver their remarks this week.

In the U.K., expectations are for the unemployment
rate to remain unchanged and the average weekly earnings to rise modestly from
6.1% to 6.3%. In Canada, inflation data showed some signs of cooling down in
the last few months. The year-over-year CPI is likely to fall from 6.8% to 6.5%
due to energy prices softening.

At the next meeting, the BoC is likely to hike the
rate by 25bps to a terminal rate of 4.50%.

According to analysts from Wells Fargo this could
be the last rate hike from the BoC if core inflation will decrease noticeably
in the coming months. However, SGH Macro analysts don’t expect the tightening
to stop until price stability is achieved.

Since the effects of monetary policy changes
usually lag, there is a possibility that the BoC will pause after the next
meeting in order to observe how things evolve. Governor Macklem warned that
hiking rates excessively could push the economy into an “unnecessarily
painful recession.”

The U.S. retail sales and industrial
production prints will be important to watch. Even though retail sales fell in
November, consumer spending remained strong. The most affected categories were
furniture and auto sales, as they are primarily funded by credit. It is
possible that retail sales will stabilize as consumer spending appears to
remain strong due to labour market tightness. For industrial production though
the overall picture doesn’t look optimistic as the declining trend is expected
to continue. The ISM Manufacturing Index is likely to contract further.

The BOJ surprised the market last month when
it tweaked its bond yield controls, to allow a wider tolerance for long-term
interest rates for its 10-year bonds, something investors didn’t expect. It is
rumoured that there will be a change in monetary policy from the BoJ at some
point, but it’s unlikely to happen until April when Governor Haruhiko Kuroda’s
mandate ends according to some analysts, but surprises can always happen.

The U.S. housing starts and existing home
sales are expected to be under pressure again with demand falling due to higher
mortgage rates.

In Australia, the labour market data will be
important for the RBA’s future decisions following high inflation numbers in
November. If there’s no slowing the Bank might be forced to hike more than the
50bps that are currently forecasted by analysts from ING.

USD/CAD expectations

With lots of data to digest this week for both
the U.S. and Canada trading the pair this week might be difficult as it lacks a
clear direction on the H1 chart.

However, a bullish divergence seems to be
forming on the H4 chart which might suggest a bigger correction for the pair
until the 1.3490 or even 1.3590 levels of resistance. From there the bearish
trend should resume taking into consideration that the market now expects rate
cuts and the USD to lose strength in the near future.

On the downside the next levels of support are
at 1.3350 and 1.3260.

A risk for this trade are the CPI data for
Canada and industrial production for the U.S. which should be closely watched.