FX Week Ahead: Greenback weakness, loonie strength – FOMC will dominate the week
USD: Strong growth but a dovish Fed – look for a weakening greenback
Spot
DXY91.043
Week ahead bias
Mildly Bearish
Weekly range
90.20 -91.50
1 month target
90.00
The USD index has already given up two thirds of this year’s gains and most think a further fall is likely. This week’s calendar is very busy one. Q1 US GDP should print very strong with some forecasts expecting a figure as high as 7% quarter on quarter, however the Fed is still positioned to be very dovish on Wednesday’s FOMC meeting. Biden’s first speech to a joint Congress is also scheduled for Wednesday where he will be discussing his plans to raise taxes including doubling of the capital gains tax for those earning over $1mn per annum.
Tech earnings will be front and center and is one of the most exposed sectors to a capital gains tax hike after enjoying spectacular returns over the last year. Overall, most think that the greenback will continue to edge lower with a lower for longer Fed stance and speculation over tax hikes likely to take the steam out of a overheating US economy. Second tier US data from March including March DGOs, April consumer confidence and the March core PCE deflator are all expected this week.
CAD: Look for the loonie to move toward 1.20 but not in the short term
Spot
USD/CAD1.2490
Week ahead bias
Neutral
Weekly range
1.2400 – 1.2550
1 month target
1.2500
The BoC’s meeting last week was a game changer for the loonie as Governor Macklem announced a C$1bn per week cut of asset purchases and changed the forward guidance to keep rates low from 2021 to the second half of 2022. The guidance was largely due to the upbeat economic projections that now see inflation moving back to target in the second half of next year. The BoC has set itself up as a leader in the tightening cycle for developed central banks: in the medium term, we expect this to provide support to CAD, with expectations for the currency pair to move toward 1.20 by the end of the year.
The short-term outlook for CAD remains strictly tied to the Covid-19 challenges, with many parts of the country still reaching new contagion peaks. Another major driver of CAD, oil, had a grim past week and with virus cases rising in all of the world’s regions except Europe, a strong rebound in crude may not be in the cards for a little longer. On the data calendar February retail sales and GDP should both be strong but may have limited market impact considering the third virus wave and the BoC policy decision.
EUR: Yes there is a technical recession…but things are looking up!
Spot
EUR/USD1.2055
Week ahead bias
Mildly Bullish
Weekly range
19.800 – 1.2150
1 month target
1.2200
This week sees eurozone 1Q21 GDP which is likely expected to contract and signal a second technical recession within a year. This contract has likely already been priced in with most focused on eurozone confidence which seems to be picking up sharply as seen in last Friday’s flash April PMI releases and should be echoed in today’s German Ifo readings. The rise in inflation should prompt the European Central Bank begin tapering and call for tighter monetary policies.
We’ll see an array of ECB speakers over the week and expect more focus on EU national spending plans. Also keep a look out for any fresh German opinion polls, where any further gains for the Greens will be treated as a EUR positive.
GBP: Most calling for a GBP/USD break above 1.40 this week
Spot
GBP/USD1.3850
Week ahead bias
Mildly Bullish
Weekly range
1.3790 – 1.4030
1 month target
1.4100
Last week’s data flow was supportive for the GBP with strong retail sales, good PMIs, inflation rising and unemployment edging lower - all pointing to a strong recovery in the economy. The data calendar this week is very quiet, and no Bank of England officials are scheduled to speak. With Covid-19 cases rising again across the world and the UK having recently relaxed containment measures, contagion data in the UK will be key to test the effectiveness of the country’s vaccination program ultimately driving expectations for a speedy recovery.
From a technical perspective, GBP continues to remain undervalued against the greenback, suggesting GBP/USD should be able to break above 1.4000 in the week ahead especially if the FOMC remains dovish on its Wednesday’s FOMC meeting.
Currency Chart
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