FX Traders Are Positioning For This Week’s Top 5 Events

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

Don’t let this quiet start to the new trading week fool you because it is going to be a very busy one in the foreign-exchange market. The main focus will be Fed Chair Janet Yellen’s semi-annual testimony on the economy and monetary policy on Wednesday but GDP, inflation, retail sales and employment reports are also scheduled for release from many major economies. So far, the U.S. dollar has caught a bid, extending last week’s gains ahead of the Chairwoman’s speech. In fact, the corresponding rise in U.S. stocks and increase in Treasury yields tells us that as a group, investors are looking for optimism. There haven’t been any dramatic changes in the U.S. economy since December – when we last heard from the Fed Chair. While earnings growth slowed and the unemployment rate ticked up, stocks are trading at record highs as both manufacturing- and service-sector activity remain steady. Based on comments made by other U.S. policymakers, the Fed is confident about the outlook for the economy and inflation. On Monday morning, the Fed said inflation expectations are at their highest level since the summer of 2015. Granted, it also said household spending expectations are at their lowest level since January, there seems to be enough improvement and uncertainty for Yellen to keep her economic assessment unchanged. There’s hope for fiscal stimulus but the terms are unclear and so it is likely she will reiterate her commitment to gradual rate increases. Yet the real question is whether that will be enough – we know that investors are hoping for some indication that a March rate hike is in play (and we don’t think it is) so if she doesn’t provide any clear plans for tightening, the market could be disappointed. USD/JPY’s inability to take out 114 is a sign of the tug of war between bulls and bears, which could remain the case until Yellen’s testimony.

Monday's main focus was Canadian Prime Minister Justin Trudeau’s visit to the White House. The press conference was respectful and benign with nothing particularly negative or positive for the Canadian dollar. Trump simply said in regards to NAFTA, they will tweak trade with Canada – it’s a much less severe situation than on the Southern Border, which is an extremely unfair situation. As a result, USD/CAD remains under pressure as the Canadian dollar holds onto its recent gains. It has been 4 trading days now that the Canadian dollar has strengthened versus the greenback even as oil prices decline. In contrast, the Australian and New Zealand dollars ticked lower despite stronger credit card spending in New Zealand. Australian business confidence and Chinese inflation data were due Monday evening. Both currencies appear poised for further losses versus the greenback.

Euro dropped to its lowest level versus the U.S. dollar in more than 3 weeks. The only piece of data released from the Eurozone was German wholesale prices, which rose by 0.8%, a slight drop from the 1.2% increased experienced last month. On Monday the EU released its winter economic forecast report, which painted a mixed picture for the region. The report stated that on most fronts, EU member states have proven to be resilient in the face of many global changes. For the first time in a decade, all EU member states are forecasted to grow throughout the full period of 2016-2017. The European commission expects euro area GDP growth of 1.6% in 2017 and 1.8% in 2018, revised up from the Autumn Forecast. However the upbeat note came with caution due to political uncertainties in many G20 countries. The EU’s Moscovici stated that he would be heading to Athens to help conclude the Greek reform review. A number of important Eurozone economic reports are scheduled for release including German and the Eurozone’s fourth-quarter GDP numbers along with the German ZEW survey of investor confidence and Eurozone industrial production. Although the 50-day SMA is currently limiting losses in EUR/USD, we expect a move to 1.05.

Sterling was one of the few currencies to end the day higher against the greenback. No U.K. economic reports were released Monday but a few Brexit comments were made. EU member Moscovici said there is a delay in the effects of Brexit on the U.K. economy while EU chief Jean-Claude Juncker admitted that Brexit quite possibly would lead to a divide among the European Union. Junker also said that any Brexit negotiations must be done through a single EU channel. This is a busy week for the pound with U.K. inflation, employment and retail sales numbers scheduled for release. Consumer and producer prices are due Tuesday and after the sharp rise in December, a pullback is expected in January. Lower CPI could stifle sterling’s rally. EUR/GBP was particularly weak on Monday but we see support at the 200-day SMA near 0.8450.