The Forex Week Ahead January 15-19th
Forex week ahead North America Government shutdown talks are at an advanced stage and will combine with the start of the Q4 earnings season to shape the main market risks over the coming week. The week starts with markets being shut for the Martin Luther King Jr holiday. A new funding deal or a continuing resolution that extends funding for a little longer will be needed in order to avoid a partial government shutdown by week’s end. At issue is that a whole lot of horse trading must go on with respect to issues that have absolutely nothing to do with funding government operations. They include the thorny and divisive issues of how to treat so called ‘dreamers’ or undocumented immigrants brought to the US when they were very young, and funding for a Mexican wall albeit seemingly comprised of sundry construction materials and swiss cheese in recent proposals versus the ‘big beautiful’ wall that was initially and unfortunately proposed.
Fed communications will be compressed into about a four-hour window next Wednesday afternoon but will probably showcase divisions. It will start with the latest Beige Book that primarily offers regional anecdotes of limited current use to Fed watchers and then moves on to a pair of regional Fed Presidents with divided views. Chicago’s Charles Evans (nonvoting, dove) speaks that afternoon followed by Cleveland’s Loretta Mester (voting, hawk). Evans would prefer to hold off on additional rate hikes and dissented against the FOMC’s decision to hike in December, while Mester is open to considering alternative inflation frameworks with a generally hawkish mindset.
Data risk should be fairly light and focused upon industrial and limited household sector readings. Industrial production is expected to post mild growth on Wednesday, followed by the Philly Fed’s regional business gauge on Thursday that has been range bound around a fairly elevated growth trend. Housing starts (Thursday) will probably moderate in December’s reading in light of prior softness in permits. The University of Michigan’s consumer sentiment reading for January will be watched to see if it extends a deterioration that also showed up in the Conference Board’s consumer confidence measure in December.
Europe Potentially material information affecting the market bias toward monetary policy in the UK and Eurozone will be the focal point over the coming week. Within the Eurozone, this will be the case in two respects. For one, revisions to Eurozone CPI for December arrive on Wednesday and with them come further needed details. Key is so-called ‘supercore’ inflation that requires such details for its calculation. There has been no material progress in this reading of Eurozone inflation for the past four years during which it has floated within a tight range of 0.8 –1.0% YoY. How ECB Governing Council members see the risks and guidance they may provide on the key topic of whether to extend bond buying past September or let the program end and/or introduce other measures will be the focal point as three Governing Council members speak. On Wednesday, Ewald Nowotny, Governor of Austria’s central bank will speak followed by Bundesbank President Jens Weidmann on Thursday and Executive Board member Benôit Coeuré that same day. Their communications take on elevated significance because the account of the December meeting noted that “The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year.” Conditioning communications upon what happens to inflation is likely but the desire is to provide guidance gradually and earlier than previously understood ahead of September.
UK CPI inflation (Tuesday) and retail sales (Friday) will be watched primarily in the context of expectations for plateauing inflation risks. CPI hit 3.1% y/y in November after a pair of 3% readings and is expected to land at a similar rate next week. Core inflation has been a little tamer. Consensus expects UK inflation to begin to back away from letter-writing territory early in the new year amid expectations for perhaps one more rate hike this year. A large gain in retail sales volumes in November poses a high barrier to another gain next week.
Asia The Bank of Japan caused a stir this past Monday when it bought fewer JGBs in the 10–25 year maturity range. That sparked a global bond market sell-off on misplaced fears that the central bank was backing away from its bond buying activities. Such fears were assuaged when subsequent purchase activity across different, shorter maturities was fairly strong and met expectations. Nevertheless, this second round of purchases did not involve the same 10–25 year bracket. Therefore, two rounds of longer-end buying of bonds in the 10–25 year and 25+ year categories on Monday and Thursday evening time will be closely monitored.