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

Market movers ahead

• Next week in the US, focus will be mainly on the FOMC meeting with the accompanying policy announcement on Wednesday and the January jobs report released on Friday.
• In the euro area, the week ahead is packed with economic releases, e.g. HICP inflation figures for January, which are due out on Tuesday.
• In the UK, the main event next week is the Bank of England (BoE) meeting on Thursday. This is one of the big meetings with an updated Inflation Report and a press conference, so watch out for an overload of information.
• The Bank of Japan (BoJ) two-day monetary policy meeting ends on Tuesday. In connection with its monetary policy announcement, the BoJ is also due to publish its Outlook Report containing the bank's updated growth and inflation forecasts.

Global macro and market themes

• Markets are struggling to grasp the policy uncertainties given the binary possible outcomes.
• However, the global economy is heading higher and the reflation theme remains intact.
• US yields should rise on Fed risks and Donald Trump's first 100 days in office.
• Over the coming three months, the USD should strengthen particularly versus the JPY and GBP.
• We are bullish on Scandi currencies, particularly on NOK.
• We remain positive on equities but note the risk of a correction in European equities.

Full Report in PDF

U.S. real GDP grew by 1.9% (annualized) in the fourth quarter according to the advance estimate, falling short of the median consensus estimate of 2.2%.

U.S. consumers, however, did not disappoint. Spending grew 2.5% (matching the median forecast for 2.5%), as spending on durable goods poster a third consecutive stellar quarter (10.9%). Spending on services was relatively weak, advancing only 1.3%, which was in part due to unseasonably warm weather depressing utility consumption.

Non-residential business investment accelerated in the fourth quarter. Total business spending grew 2.4%, as spending on equipment investment (3.1%) and intellectual property (+6.4%) outweighed a drop in structures (-5.0%).

Residential investment was also up a hearty 10.2%, after declining in the previous two quarters.

As expected, net-exports exerted a considerable drag on growth in the fourth quarter. Exports fell 4.3%, after jumping 10% in the third quarter, on a one time surge in soybean exports. More surprising was the 8.3% surge in imports. In total, net exports subtracted 1.7%-points from growth, after adding 0.9%-points in the third quarter.

Inventory investment was another big contributor to the headline, adding 1.0%-point.

Key Implications

While the fourth quarter growth headline came in short of expectations, much of the weakness stemmed from a larger-than-expected rebound in imports. The details on domestic demand were much stronger. Final domestic demand was up 2.5%, a step up from 2.1% in the previous quarter. Domestic demand is a better predictor of future growth than headline GDP, and the strength augurs well for the next year. Moreover, this estimate of GDP growth relies on incomplete information. There has been a consistent pattern of upward revisions to growth estimates over the past year, so this is not the final word on fourth quarter growth.

With all of 2016 now on the books, the economy grew by a modest 1.6% on an annual average basis, a step down from its 2.6% pace in 2015. However, this reflects a disappointing first half of the year. Looking at growth on a year-end to year-end basis, the U.S. economy grew by 1.9%, just slightly above the 2015 clip. We expect growth to accelerate above the 2.0% mark over the next year, supported by ongoing consumer spending growth and a firm rebound in business investment.

Today's report continues to show a U.S. economy that is still taking up economic slack, and warrants a gradual pace of rate hikes by the Fed. The Fed's preferred inflation measure was up a tame 1.3% in the fourth quarter, underscoring why the Fed can afford to be patient on rate hikes. In our recent Dollars & Sense publication, we outline that we expect the Fed to raise rates twice over the next year, raising its key policy rate every six months or so.

• The advance estimate of U.S. Q4 GDP growth was 1.9%, down from 3.5% in Q3 but still marking a slightly 'above-trend' pace of growth.
• Net trade was the main source of drag in the quarter, although in part reflecting a reversal of a transitory food-led export gain in Q3. Excluding net trade and inventories, final sales to domestic purchasers rose 2.5%, marking the strongest increase since Q3/15.

Net trade subtracted an outsized 1.7 percentage points from Q4 GDP growth, although in part reflecting a reversal of a transitory jump in Q3 food exports. Overall exports declined by 4.3% in Q4 after jumping 10.0% in Q3. Imports jumped 8.2% in Q4 (the largest increase in 2 years). The import gain was consistent with stronger domestic demand with final sales to domestic buyers rising 2.5%, led by another strong gain in consumer spending (+2.5% in Q4 following a 3.0% increase in Q3), a modestly stronger increase in business investment (+2.4% in Q4 vs 1.4% in Q3) and a 10.2% jump in residential investment following two quarterly declines.

Our Take:

Although slower in Q4 than the increase in Q3, average growth in the second half of the year was nonetheless significantly improved from the disappointing 1.1% average increase in the first half. The composition of growth in Q4 was also, arguably, somewhat better than the Q3 gain. Net trade was somewhat disappointing with the drag in Q4 from that component more-than-retracing a jump in Q3 (much of which reflected a transitory jump in food exports that unwound in Q4); however, the typically more stable final sales to domestic buyers measure rose by its strongest pace in more than a year, in part reflecting a jump in residential investment but also a third consecutive rise in business investment. Early data on capital goods shipments released separately this morning point to the potential for further improvement in Q1 in that latter component. Although much uncertainty about the future of U.S. fiscal policy remains, we continue to expect that underlying economic activity continues to improve at a pace that should be sufficient to allow the Fed to continue hiking interest rates at a modest pace. Our forecast assumes 2 additional 25 basis point hikes to the fed funds target range this year.

Daily Pivots: (S1) 1.0636; (P) 1.0701 (R1) 1.0744; More.....

Intraday bias in EUR/USD stays neutral for the moment. As noted before, choppy rise from 1.0339 is seen as a corrective move. Break of 1.0588 minor support will argue that it's completed and turn bias back to the downside for 1.0339 support. In case of another rise, upside should be limited by 1.0872 resistance.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

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Daily Pivots: (S1) 1.2540; (P) 1.2607; (R1) 1.2657; More...

Intraday bias in GBP/USD remains neutral at this point. Rise from 1.1986 is seen as the third leg of the consolidation pattern from 1.1946. Break of 1.2414 support will indicate that it's completed and turn bias to the downside for retesting 1.1946 low. In case of another rise, upside should be limited by 1.2774 to limit upside and bring down trend resumption eventually.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

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Daily Pivots: (S1) 0.9971; (P) 0.9999; (R1) 1.0029; More.....

Intraday bias in USD/CHF remains neutral for consolidation above 0.9958 temporary low. With 1.0121 minor resistance intact, deeper decline is still expected. As noted before, rise from 0.9443 has completed at 1.0342 already, after failing to sustain above 1.0327 key resistance. Fall from there would now target 61.8% retracement of 0.9443 to 1.0342 at 0.9786 and below. On the upside, break of 1.0121 resistance is needed to indicate short term bottoming. Otherwise, near term outlook will stay bearish in case of recovery.

In the bigger picture, rejection from 1.0327 resistance suggests that consolidation pattern from there is still in progress. Fall from 1.0342 is seen as the third leg and retest of 0.9443/9548 support zone could be seen. But we'd expect strong support from there to contain downside. At this point, we're still expect the larger rally to resume later to 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

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Daily Pivots: (S1) 113.42; (P) 114.13; (R1) 115.23; More...

USD/JPY is still bounded in range of 112.51/115.61 and intraday bias remains neutral. No change in the view that choppy fall from 118.65 is a corrective move. Break of 115.61 will indicate that it's completed and will turn bias to the upside for retesting 118.65 resistance. Break will resume whole rise from 98.97 and target 125.85 key resistance. Below 112.51 will extend the decline but downside should be contained by 38.2% retracement of 98.97 to 118.65 at 111.13 to complete the correction and bring rebound.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

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Dollar's recover lost steam quickly today and is set to end the week mixed. US GDP grew 1.9% annualized in Q4, below expectation of 2.2%. GDP price index rose 2.1%, met consensus. Durable goods orders dropped -0.4% in December, much lower than expectation of 2.6%. Ex-transport orders rose 0.5%, met expectations. UK prime minister Theresa May will meet US president Donald Trump in Washington today and that could be a focus. US futures point to a flat open and markets could turn into profit taking mode after record rerun in stocks.

Eurozone M3 rose 5.0% yoy in December versus expectation of 4.9% yoy. Bank loans to companies rose 2.3%, fastest since mid-2009. Household lending rose 2.0%, fastest since mid-2011. The set of data showed that ECB's cheap money is making its way through the economy. And such development could lift growth and inflation later down the road. Also from Eurozone, German import price index rose 1.9% mom, 3.5% yoy in December versus expectation of 1.3% mom, 2.7% yoy.

Yen falls broadly today on news that BoJ boosted JGB purchases. The move is seen as an act under the so called yield curve control to cap surge in yields, which touched 11 month highs earlier this week. The central bank said today that it would buy JPY 450b of JGBs with maturity of more than five to 10 years. That's nearly 10% above the prior size of JPY 410b. Released from Japan, national CPI core improved to -0.2% yoy in December, up from -0.4% yoy and above expectation of -0.3% yoy. Tokyo CPI core rose to -0.3% yoy in January, up from -0.6% yoy, and above expectation of -0.4% yoy. The set of inflation data showed mild improvement to inflation outlook. But it's still far from hitting BoJ's 2% target. Elsewhere, Australia PPI rose 0.7% qoq, 0.7% yoy in Q4. Import price rose 0.2% qoq in Q4.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 113.42; (P) 114.13; (R1) 115.23; More...

USD/JPY is still bounded in range of 112.51/115.61 and intraday bias remains neutral. No change in the view that choppy fall from 118.65 is a corrective move. Break of 115.61 will indicate that it's completed and will turn bias to the upside for retesting 118.65 resistance. Break will resume whole rise from 98.97 and target 125.85 key resistance. Below 112.51 will extend the decline but downside should be contained by 38.2% retracement of 98.97 to 118.65 at 111.13 to complete the correction and bring rebound.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

Economic Indicators Update

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Global stocks marched into gains during trading this week after the renewed Trump fuelled optimism bolstered investor risk sentiment. Actions speak louder than words and the fact that Donald Trump has signed numerous executive orders since his inauguration continues to heighten hopes of the proposed fiscal stimulus measures materialising. Asian shares were mostly higher on Friday ahead of the Lunar year holiday while European markets edged lower amid profit taking. With the Trump effect back with a vengeance and optimism rapidly rising over Trump's pro-business policies elevating growth, Wall Street could maintain gains moving forward.

While the current gains displayed across global stocks are highly impressive, the lingering uncertainty could obstruct further upside in the longer term. Concerns are currently heightened over Trump's protectionist rhetoric while political risks across the globe weigh heavily on sentiment. Investors should remain diligent and be prepared to expect the unexpected this quarter when factoring the messy cocktail of market themes that may spark extreme levels of volatility.

Dollar Stabilizes above 100.00

The Greenback regained its dominant attitude on Thursday as prices stabilized above 100.00 after the Trump effect and optimism over the health of the US economy re-attracted bulls to install heavy rounds of buying. Sentiment has turned bullish towards the Dollar in the short term and further gains could be expected if buyers exploit the upside momentum created from fiscal stimulus-driven rally. Much attention may be directed towards Friday's fourth quarter GDP report which could offer some clues on how the US economy fared in 2016. A positive release that exceeds expectations may provide the Dollar an additional welcome boost that could propel the Dollar Index higher towards 101.00.

Although Donald Trump has revived the Dollar this week, there is a threat of him exposing the currency to downside risks in the future if the protectionist stance and overall uncertainty repels investor attraction. As of writing, the Dollar Index currently hovers around 100.63 with a breakout above 101.00 encouraging a further incline higher towards 102.00.

Sterling hovering around 1.2500

The Sterling bulls were exhausted on Thursday despite the positive fourth quarter UK GDP of 0.6% and such continues to highlight how the Brexit woes have damaged buying sentiment towards the currency. It has become very clear that the Brexit developments continue to dictate where the Sterling trades with uncertainty to likely limit upside gains. Sentiment remains firmly bearish towards the Pound with sellers potentially exploiting any further uncertainty or even a resurgent Dollar to drag the GBPUSD lower. Technical traders may pay close attention to how the prices react to the previous 1.2500 resistance level. A breakdown and daily close below 1.2500 could encourage a further selloff back towards 1.2350.

Commodity spotlight - Gold

Gold found itself exposed to painful losses this week after the renewed investor risk appetite from the Trump effect and Dollar's resurgence encouraged sellers to attack the metal incessantly. The yellow metal currently trades around a fresh two-week low at $1181 and is at risk of trading lower if the fourth quarter GDP for the United States exceeds expectations. The downside momentum is strong and a breakdown below $1180 could spark a further selloff towards $1160.