Weekly Analyses

The Russia-Ukraine tensions, for example, were front and center last week, pushing markets up and down, even as the situation remains in “deadlock” mode (with neither escalation nor de-escalation). Although the moves were relatively modest, safe-havens were bought and risk-sensitive currencies were sold on news headlines that “Russia is about to invade Ukraine.” Then it became clear that this was not the case and the moves duly reversed.

Wednesday will be the busiest day, seeing the release of the retail sales report and then the FOMC minutes later in the day. Consumer spending is an important metric that the Fed closely monitors, and a solid retail sales report should confirm the strength of the US economy. The FOMC minutes may provide more details about the Fed’s tightening plans, which likely means we can expect a bullish USD reaction, if any. Several FOMC members have speeches throughout the week, including Bullard again today and on Thursday. More Fed officials favoring a 50bp March hike or faster QT (quantitative tightening) would likely refuel the USD’s bullish move.

Everyone expected a dovish ECB, but those hot (flash) CPI reports days before the meeting seem to have changed their mind. The ECB was hawkish! OK, maybe not as hawkish as other central banks, but ECB Chief Lagarde sounded much less dovish than most anticipated during the press conference, hence the HUGE reaction in EUR pairs. Like Powell the week before, Lagarde did not deny any of the speculations about ending QE earlier or an ECB rate hike later this year. This was the big surprise, and investors who held short EUR positions closed out as a result.

The dollar rallied powerfully last week, following the markets’ hawkish takeaway from the Fed meeting. The absence of strong pushback by Chair Powell against commencing QT or delivering a (double) 0.5% rate hike in March was the key reason for the perceived hawkishness. Essentially, the Fed has said anything is possible, and as long as the inflation and employment data justify it, they will not hesitate to tighten policy forcefully. This was all the market needed to take the USD higher.

Last week, the dollar remained in its ranges but recovered some lost ground from early January, much as we anticipated in our previous weekly edition. The overall USD sentiment remains neutral with a bullish tilt. That could very well be amplified this week given the packed calendar. The Fed meeting on Wednesday is in central focus for Fx traders. It’s not a question “if” the Fed will be hawkish, but rather “how much”? This is the key question for where the USD will trade later this week. There appear to be two relatively probable scenarios for Wednesday’s meeting:

The greenback extended its corrective decline before modesty rebounding on Friday to close the week off the lows. This was despite the US CPI inflation report showing a 7.0 y/y increase, the highest in 40 years (note here that rising inflation usually leads to a stronger currency as it fuels rate hike expectations). With the next Fed meeting scheduled for next Wednesday (Jan 26), the broad consolidation will likely continue, though we may already start to see some flows coming back into the dollar, helping it maintain a firmer tone compared to the past two weeks. For instance, the same argument for positioning may soon start working in the other direction as long positions were probably lightened with the USD decline last week.

The central focus on this week’s US calendar is the CPI inflation prints on Wednesday. Both the headline and core figures are expected to come in hot, which should keep Fed tapering and tightening prospects in place. Potential upside surprises in the CPI numbers would likely lead to USD strengthening as this will further increase the pressure on the Fed to act earlier and swifter.

King dollar returns with a vengeance as Fed leads CBs in the fight against inflation; Uber-Dovish ECB to keep EUR under pressure in 2022; EURUSD Technicals: Entering 2022 at crucial support; GBP Fundamentals: Can you trust an unreliable BOE to deliver the expected tightening?; JPY Fundamentals: Better yields elsewhere keep bearish yen narrative intact

US Dollar Euro Pound Yen Fundamental Outlook EURUSD GBPUSD USDJPY Technical Analysis