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Dollar Stumbles After Soft GDP and Trump Negotiation Skills

Central banks to remain on hold with politics at the forefront

The dollar is weaker after the Trump administration remained more focused on anti-trade policies than the fiscal stimulus and infrastructure spending that lifted inflation expectations in the U.S. The first 100 days of Trump’ administration will be crucial. While he seemed bulletproof during the campaign his administration has stumbled over itself on an overall strong start, but lacking some strategy or political savvy. He has yet to bring markets onside with any tangible policy on fiscal stimulus or infrastructure spending. There is an expectation of higher inflation, which in turn has made the Fed up their rate hike forecasts to 3/4 this year. The Fed had the luxury of patience on monetary policy tightening in the past due to the stagnant inflation, but a government willing to spend to boost growth could force a faster pace of interest rate rises.

The economic calendar for January 30 to February 2 is packed to the brim with important releases. Four central bank rate decisions: Bank of Japan (BOJ), U.S. Federal Reserve, Bank of England (BoE) and Reserve Bank of Australia (RBA). Manufacturing data from the United Kingdom, United States and China. Employment data out of the U.S. with the publication of the ADP private payrolls and the biggest indicator in the currency markets the U.S. non farm payrolls (NFP) to finish the week. Traders will have to keep a close eye on their calendars this week as a deluge of data will be hitting the wires.

The EUR/USD gained 0.012 percent in the last five days. The single currency is trading at 1.0694 in a week full of volatility but that ultimately ended flat for the most traded pair. The release of the disappointing first estimate of the U.S. gross domestic figures (GDP) at 1.9 percent growth in the fourth quarter of 2016. Last week President Trump pledged to hit 4 percent figures through fiscal stimulus and infrastructure spending. The softer economic indicators and Trump’ lack of details on the two factors that sparked the rally in global markets put downward pressure on the dollar.

The Fed has received the backing of U.S. Treasury Secretary nominee Steven Mnuchin regarding the independence of the central bank. The Federal Open Market Committee (FOMC) on Wednesday is not anticipated to bring any surprises after the December rate hike the central bank is expected to wait-and-see to gauge the impact of the first 100 days of the Trump administration and adjust the interest rate if needed. A rate hike is not forecasted in the first quarter of the year and the Fed is willing to let the economy run a little hot before stepping in. The lack of details from Trump policies on policies who could bump inflation higher have kept the probabilities of no changes in the interest rate at 96 percent in February according to the CME’ FedWatch tool that tracks Fed Fund futures prices.

US Growth was slowed down by imports, which brings trade to the forefront, but the rise in imports was fuelled by a strong dollar not a lack of tariffs. Currencies that have depreciated against the dollar enjoy a competitive advantage. Trump administration is creating a paradox by focusing on growth which will boost the USD versus wanting more exports that are hurt with a strong USD. There are few good outcomes of the trade spat with Mexico with the focus on the proposed wall between the two nations and who will pay for it. A questionable matter of national security has hijacked the conversation away from the promised policies on growth initiatives.

American jobs are forecasted to have another 150,000 plus reading on Friday, February 3 with the release of the U.S. non farm payrolls (NFP) by the Bureau of Labor Statistics. The emphasis on market watchers will be on wages more than the headline jobs number. The positive wage growth in the December data was the highlight even if the headline number missed expectations. Worker’ take home pay is expected to grow 0.3 percent in the last month.

The GBP/USD rose 1.828 percent in the last week. The pair is trading at 1.2548 after the U.K. supreme ruled against the government and forced it to go through parliament regarding the exit of the United Kingdom in the European Union. The idea of a softer Brexit boosted the pound as markets had punished the currency as PM Theresa May kept pushing for a clean break with no back up deal in place. The ruling will push back May’ timeline for a Brexit and could indeed soften the end result. The British PM visit to Washington to meet President Trump will be a first approach with the goal of reaching a fast trade deal with the U.S. but in the current anti-trade climate in America that is easier said than done.

The Bank of England (BoE) is expected to hold rates unchanged on the first Super Thursday of the year. Super because of the release of the inflation report, interest rate decision, minutes from the monetary policy committee and a speech by BoE governor Mark Carney. The threat of Brexit has loomed over the central bank, but with an unclear timeline all that is left for policymakers is to wait.

Market events to watch this week:

Monday, January 30

  • Midnight JPY Monetary Policy Statement
  • Midnight JPY BOJ Outlook Report
  • Midnight JPY BOJ Policy Rate

Tuesday, January 31

  • 1:30am JPY BOJ Press Conference
  • 8:30am CAD GDP m/m
  • 10:00am USD CB Consumer Confidence
  • 4:45pm NZD Employment Change q/q
  • 4:45pm NZD Unemployment Rate
  • 5:35pm CAD BOC Gov Poloz Speaks
  • 8:00pm CNY Manufacturing PMI

Wednesday, February 1

  • 4:30am GBP Manufacturing PMI
  • 8:15am USD ADP Non-Farm Employment Change
  • 10:00am USD ISM Manufacturing PMI
  • 10:30am USD Crude Oil Inventories
  • 2:00pm USD FOMC Statement
  • 2:00pm USD Federal Funds Rate

Thursday, February 2

  • 4:30am GBP Construction PMI
  • 7:00am GBP BOE Inflation Report
  • 7:00am GBP MPC Official Bank Rate Votes
  • 7:00am GBP Monetary Policy Summary
  • 7:00am GBP Official Bank Rate
  • 7:30am GBP BOE Gov Carney Speaks
  • 8:30am USD Unemployment Claims
  • 7:30pm AUD RBA Monetary Policy Statement
  • 8:45pm CNY Caixin Manufacturing PMI

Friday, February 3

  • 4:30am GBP Services PMI
  • 8:30am USD Average Hourly Earnings m/m
  • 8:30am USD Non-Farm Employment Change
  • 8:30am USD Unemployment Rate
  • 10:00am USD ISM Non-Manufacturing PMI

*All times EST

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