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US CPI, UK GDP & Earnings

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There’s been a big reversal in market trends this week – the dollar is going lower and there’s been a bounce in major forex pairs so I’ll give my take on whether this reversal can hold, while also running down this week’s economic calendar! Stay tuned


Hi everyone, a very warm welcome to another edition of the week ahead, where I look at market trends and preview upcoming market events.


There has been quite the comeback in the euro, the British pound and the Aussie in the past few days - and - there’s been a rebound in stock markets. So we can say that there has been a more risk-on tone in markets. But why is that?


From a currency perspective, attention in markets shifted away from the Federal Reserve to the other big central banks, including the European Central Bank, the Bank of England and the Reserve Bank of Australia. Eurozone inflation hit a record high of 5.1 percent year-over-year in January, it’s less than in the US but it suggests the ECB really need to act faster. The Bank of England already appreciate the higher UK inflation and are raising rates and markets are increasingly expecting higher Australian interest rates this year despite a dovish RBA.


So putting all that together, let’s me lay out the bearish dollar case. It could be that during most of last year, markets were buying the USD in expectation of Fed rate hikes. Now that 4 or 5 hikes are priced in for 2022, it might be that markets are now forecasting rate hikes elsewhere in the world before they are officially acknowledged with, for example, a higher euro, pound or Aussie. If this is the case, we may have just witnessed a false breakout in the dollar.


Now on the flipside I think the bullish dollar case is more straightforward – the Federal Reserve is unwinding its massive monetary stimulus that weighed down the dollar and now the dollar is regaining its strength. If this is what’s going on, then this is just a retracement in the downtrend for the euro and other major currencies.


OK, before I turn to the economic calendar – Q4 earnings season is still in full swing. The big tech companies are mostly out of the way but there are still a number of household names reporting this week from Disney to Coca-Cola to Pfizer, Toyota, BP and Uber.


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So let’s round things off with the economic calendar. I would say there is very much a slowdown in the releases of market-moving news this week after two very busy weeks. The big ones I’d point to are at the end of the week with US CPI on Thursday and UK GDP data on Friday. We all understand at this point that the Federal Reserve is moving to combat high inflation so then as inflation data continues to show bigger numbers, as is expected this time from 7 to 7.2 percent, then it’s fair to make the conclusion the Fed will probably need to act faster on rate hikes, which should support the dollar.


Likewise, Sterling has been one of the top FX performers this year thanks to a hawkish Bank of England- and if UK GDP holds up, there will be less concern from British central bankers that higher rates will unduly slow economic growth- meaning they can normalise policy quicker, which helps the pound.


Right thanks everyone, good luck trading this week and make sure to click on subscribe so you don’t miss the next episode of the week ahead.


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