Weekly outlook: January 27th- 31st

Fed’s and BoE’s interest rate decision in focus With increased worries about the spread of the coronavirus, the Davos forum drawing to a close and after a lukewarm ECB interest rate decision we turn our attention to the coming week. Main events expected to rock the markets could include the Fed’s interest rate decision, BoE’s uncertain interest rate decision and a number of financial releases including the US GDP advanced growth rate for Q4, Eurozone’s preliminary HICP rates for January as well as the preliminary GDP rate for Q4. However, it should be noted that the next week is to provide a plethora of important financial releases which could be also quite important. USD – Fed’s interest rate decision in focus In the inner US political front, the impeachment trial of president Trump continues at the US Senate, making lots of headlines. The first signals though from the proceedings, seem to show that the Republican controlled Senate could be more inclined towards acquitting the US President, as Republican senators seem to remain unimpressed by the accuser’s rhetoric and argumentation so far. Should such signals multiply, we could see the market’s initial hunch for an acquittal of the US President strengthening. On the international stage, as the US-Sino front seems to be somewhat quiet, at least for now, the European front with possible trade frictions seems to be opening. However, this trade front may not be so intense, as the US and the French president declared a truce on France’s anti tech tax at the Davos meeting, which was a major difference between the US and the EU. On the monetary policy sector, the FOMC’s interest rate decision on Wednesday stands out. The bank is to release its decision in the late American session and is expected to remain on hold, keeping the target range between +1.50%-+1.75% unchanged. Currently Feds Funds Futures imply a probability of 87.7% for such a decision to take place. Should the bank remain on hold as forecasted we could see the market’s attention turning to the accompanying statement and Jerome Powell’s press conference later on. We could see the policy being described as appropriate, probably also adding that it will continue to be monitored. A possible positive note could be a hint that uncertainties related to international trade may be weakening. Should the Fed remain on hold as expected and not deviate much in tone from the December decision, we could see volatility rising for US pairs maybe though not extend much in uncharted waters.

In contrast to the past week, which was rather poor concerning US financial releases, traders are expected to be quite busy next week. On Tuesday we get the US durable goods orders growth rates for December and the US consumer confidence indicator for January. On Thursday we get the US GDP growth rate for Q4, while on Friday the adjusted consumption rate for December is due out, along with the Fed’s favourite inflation measure, the Core PCE Price index for December. GBP – BoE: To cut or not to cut Brexit took a backseat last week and we could see it still lingering on in the coming week, yet remain behind the scenes. One of the main issues for the pound last week were the intentions of the BoE in its next meeting. The moment of truth nears, as in the coming week the BoE is to release its interest rate decision. The release is due on Wednesday in the late European session and the actual rate decision seems uncertain on whether to cut rates by 25 basis points and lowering current rates of +0.75% to +0.50% or to remain on hold. It is characteristic that the uncertainty regarding the decision, that GBP OIS during today’s early European morning were providing a probability of 56.23% for the bank to proceed with a 25 basis points (bp) cut, while after the UK preliminary PMI’s were released the percentage for a rate cut dropped to 51.74%. Should we see UK’s financials, the slowing CPI, retail sales and GDP growth rates favor the the possibility of rate cut which could provide a boost to the UK economy. On the other hand, the recent labor data for December, showed an extraordinary tight UK labor market, with the unamployment rate remaining at very low levels for UK standards. Also the release of January’s preliminary PMIs were quite promising especially for the UK services sector. Its not surprising that some analysts even mentioned the possibility of the prospect of an imminent rate cut by the Bank of England being now remote after the release of the PMIs, implying that the bank may prefer a wait and see position keeping rates unchanged on Thursday. However given the dovish comments made by a number of BoE officials, including BoE governor Mark Carney, we tend to be more inclined that the bank may proceed with a cut, however there is still some time ahead for things to change. As for financial releases, next week is expected to be rather slow for the pound as not many are expected. Nevertheless, pound traders may be interested in the release of the CBI distributive trades on Tuesday, while on the Wednesday we get the Nationwide house price index for January. During Friday’s Asian session we get UK’s GfK Consumer Confidence indicator for Janaury.

EUR – Financial data in the forefront Before we start our comment about the comming week we would like to make a pause and discuss ECB’s interest rate decision, released on Thursday as well as Christine Lagarde’s press conference. Despite the bank keeping rates unchanged as forecasted, it may have sounded more dovish than expected, thus disappointing the markets. Also the bank officially launched its strategy review and revealed details about the timetable and scope. The review is expected to last until the end of the year albeit the bank’s president stated that ”it will be over, when it is over”. Inflation is expected to be one of the main areas of concern as the bank is to change the inflation target definition of “close but below 2%”. Analysts tend to note that the bank could remain on hold throughout the period and place more emphasis on the review in the coming months, should Eurozone’s economic indicator’s agree with the bank’s forecasts. Lagarde also stated that the risks for the area’s growth remained tilted to the downside, yet recent indicators show that the risks are “less pronounced”. On a second note, interestingly enough, the bank’s chief during her passing by at the Davos Forum on Friday, downplayed the recent acceleration of the inflation rates, characterising them as “really minor”. On the other hand, the preliminary inflation rate for January is due out next week (Friday) for the area and should it accelerate, may not seem so minor. Yet it should be noted that the same day we get the preliminary GDP growth rate for the Eurozone for Q1. However the markets may start reacting before Friday as number of financial data are due out. On Monday we get Germany’s Ifo Business climate for January and on Wednesday Germany’s GfK consumer sentiment for February. On Thursday we get Germany’s unemployment data for January as well as a number of financial data regarding the Eurozone for January such as the Business climate, the industrial climate and December’s unemployment rate as well as Germany’s preliminary HICP rate for January. Given also that preliminary PMI’s of France, Germany and the Eurozone released today, being quite favorable, we could see the common currency being more data driven. EUR traders could be searching the releases for clues strengthening or correcting arguments that the Euro area is slowly but steadily bottoming out economically.

JPY –Safehaven inflows to feed the JPY JPY managed to strengthen against the USD in the past few days, mainly feeding from safehaven inflows, caused by the outbreak of the new coronavirus. We could see the JPY strengthening further should there be more headlines about the spreading of the disease and negative developments on the issue. The support for JPY came after the dovish interest rate decision by the BoJ, which left interest rates unchanged. The bank also in its forward guidance mentioned that interest rates are to remain at current or lower levels for as long as needed for downside risks to be addressed and inflation to pick up. Also, the bank maintained as expected the 10-year JGB yield target around 0% as expected. At the same time BoJ raised its GDP expectations and lowered the respective CPI forecasts. Overall the Japanese currency remained largely

unimpressed by the decision, once again underscoring the market’s certainty for the bank’s ultra loose monetary policy. Nevertheless, next week the summary of opinions of that meeting is to be released (Wednesday’s Asian session), and analysts are expected to scrutinize the document for any clues showing the bank’s future intentions. As for financial releases, beginning on

Wednesday we get Japan’s consumer confidence for January while a slew of data comes on Friday when we get December’s unemployment rate, the preliminary industrial output growth rate and the retail sales growth rate, all for December. AUD – Inflation rates to affect the Aussie The Aussie seems to have weakened against the USD in the past week and most analysts were quick to make the connection with the spreading of the coronavirus. The virus has up until now claimed the lives of 26 persons and confirmed cases have been found even in the US. Some relief for the markets was in the cards on Thursday though as the World Health Organization stated that it may be a “bit to early” to declare the new coronavirus as a global threat. It should be noted though that China has set the site of origin of the virus (Wuhan) under lockdown, cutting transportation networks, something that was characterized as unprecedented and underscored the seriousness of the situation. Should the situation worsen, we may see the Aussie slippping further and vice versa. It should be noted though that amid the turmoil December’s unemployment data showed an unexpectedly tight Australian labour market, causing the Aussie to jump. albeit the bushfires receded somewhat in the past days, the recent airplane crash with three men dead darkened further the mood in Australia.

As for financial releases, Aussie traders are to wait until Wednesday when the country’s CPI rates for Q4 are to be released and should the rate accelerate, in combination with the solid December employment figures allready released, we could see RBA’s confidence getting a slight boost. However its not only Australian releases which could affect the AUD next week, China’s NBS PMIs for January and especialy the manufacturing PMI on Friday could also influence the Aussie’s direction.