The question is will the Fed intervene in to mitigate the bond sell off?
USD: Will the Fed start expressing concern over the disorderly bond sell off?
Spot
DXY90.630
Week ahead bias
Mildly Bullish
Weekly range
90.10 - 91.80
1 month target
90.00
The expected sell-off in US Treasuries turned disorderly last week which had left most analysts wondering if the Fed cares about the current state of affairs. This coming week will see a slew of Fed Speakers including Fed Chair Powell, providing the Fed with the opportunity to slow the Treasury decline by at least expressing to start some concern which has been lacking so far. Adding more fuel to the fire this coming week will be February’s ISM and jobs report. This week will also see the release of the Fed’s Beige Book in preparation for what’s turning into a crucial March 17th FOMC meeting.
The recent disorderly sell-off of Treasuries has started a significant ripple effect across most asset classes including equities and pressing up against credit spreads. Market corrections will likely continue to be short and sharp with increased volatility until the Fed chooses to verbally intervene in the bond market, we would say risk assets remain vulnerable over the week ahead and the dollar could enjoy a brief corrective rally.
CAD: Loonie remains the most resilient currency in the commodity bloc
Spot
USD/CAD1.2677
Week ahead bias
Neutral
Weekly range
1.2550 - 1.2720
1 month target
1.2500
The loonie continues to remain resilient compared to other commodity currencies including the AUD and NZD despite the risk in risk sentiment which is likely to continue into the week. The correction in oil prices has also been quite contained, which should continue to provide support to CAD.
On the data front, Canadian GDP numbers for December will be released, giving markets a chance to assess the slump in 4Q20. Still, the impact on CAD should be contained considering the release is quite outdated in light of new vaccine-related developments.
EUR: Is the ECB ready to backup its rhetoric with further bond action?
Spot
EUR/USD1.2120
Week ahead bias
Neutral
Weekly range
1.1950 - 1.2150
1 month target
1.2200
Unlike the Fed, the ECB has dialed up the rhetoric and up verbal intervention to resist the bond sell-off and has strongly hinted at using the flexibility of its bond buying Pandemic Emergency Purchase Programme (PEPP) to resist bond selloffs. Over recent weeks the ECB has scaled up PEPP buying to EUR17bn per week – and this amount at least must be seen on Monday to avoid a further sell-off in European bond markets.
The week ahead will also see the Eurozone flash CPI for February, expected to rise slightly at the headline level. Any upside surprises won’t help European debt, nor the ECB’s threats that rate cuts are still an option. This all comes at a time when Europe will debate re-opening economies and we should get a broader perspective on the February PMI readings. As above with the dollar section, a risk asset correction spreading more broadly and violently warns that the coming week could see EUR/$ trade well under 1.20.
GBP: Its full steam head for the GBP
Spot
GBP/USD1.3947
Week ahead bias
Neutral
Weekly range
1.3800 - 1.4200
1 month target
1.3800
While the GBP has been resilient for most of the month of February, the currency eventually took a hit from the rising US Treasury yields. We continue to remain bullish on the GBP and regard the recent decline as a bull market correction. Similar to most analysts, we expect the GBP/USD to remain a bid and will continue to benefit from vaccine dividend and the less dovish BoE.
Data wise, the focus of the week will be on the UK budget (Wednesday). Most expect the furlough schemes and all the other associated cashflow policies to get extended until June, to mirror the re-opening plan. We also don’t expect major tax announcement next week. Overall, the additional fiscal support to be announced next week should underscore the constructive outlook for GBP for 2Q, with the further fiscal help facilitating the economic rebound and making GBP the outperformer in the G10 FX space.
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