USD: Powell’s challenge will be to walk a fine line
Spot
DXY90.314
Week ahead bias
Neutral
Weekly range
89.80-90.80
1 month target
90.00
The US bond market continues to remain the key driver for global financial markets and bond investors will eagerly be awaiting semi-annual monetary policy testimony from Fed Chair Powell on Tuesday. His challenge will be to walk a fine line of expressing confidence in the recovery but not too much confidence which will cause the bond markets to collapse. Powell will also most certainly downplay the upcoming rise in inflation into 2Q to promote an orderly bond market decline.
US data this week should show a slight upward revision to the 4Q20 GDP and then on Friday January personal income numbers. This is expected to jump on the back of stimulus cheques – but should be the move should already be priced in by now. We’ll also see the Fed’s core PCE deflator – which is expected to be contained near 1.4/1.5% YoY in January. The coming week should also see some progress on the US$1.9trn fiscal stimulus bill, where a vote could go to the House floor on Friday.
CAD: Loonie primed to move below 1.26
Spot
USD/CAD1.2782
Week ahead bias
Neutral
Weekly range
1.2700-1.2850
1 month target
1.2700
The loonie had a strong week, in line with other commodity currencies. Other factors are also contributing to put a floor below CAD: the improved outlook for the US economy (thanks to encouraging economic data and vaccination figures), on which Canada heavily relies on, and WTI staying around US$60/bbl, despite Friday’s short lived sell off.
The conditions seem ripe for the USD/CAD to move below the 1.26 level which held last week. The global recovery narrative and the USD facing fresh pressure should allow the loonie to benefit. This week keep an eye on the speech by BoC Governor Tiff Macklem, although most expect that he will continue to send a cautious message to the market in spite of the improved economic outlook.
EUR: An ifo surprise could push the euro higher
Spot
EUR/USD1.2130
Week ahead bias
Neutral
Weekly range
1.2050-1.2200
1 month target
1.2200
EUR/USD survived some dollar strength last week and could enjoy some strength today should German February Ifo number to surprise on the upside. Friday’s German composite PMI for February was slightly stronger than expected, led once again by the manufacturing sector. This positive sentiment could suggest that Germany was weathering the lockdown much better than expected.
We’ll also hear from Christine Lagarde today. This year’s consolidation in EUR/USD seems to have calmed the ECB down a little – the euro did not feature prominently in the January ECB minutes. Put all together, the EUR could inch higher over the coming week.
GBP: There’s no stopping the GBP…further upside expected
Spot
GBP/USD1.4013
Week ahead bias
Bullish
Weekly range
1.3870 – 1.4250
1 month target
1.3800
This past week was another strong week for GBP, with the currency benefiting from good news on the vaccination front that points to a strong economic rebound in 2Q. The GBP is now moving into a new normal as the switch from Brexit-related uncertainty to the vaccine rollout-related upside to the UK growth outlook argues for more frequent periods of GBP strength.
Domestically, the focus will be on PM Johnson, who is set to unveil the roadmap for reopening the economy today. While the underlying message is likely to be cautious with no formal dates set, the fact that the UK is moving towards such a roadmap underscores the constructive outlook of GBP for the coming months. The UK jobs report (Tuesday) should show further stabilization in the unemployment rate.
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