US CPI will likely be the main highlight of the week
USD: Expectations of Biden’s stimulus plan fueling inflationary pressures
Spot
DXY90.048
Week ahead bias
Neutral
Weekly range
90.50 -91.50
1 month target
91.00
Before the release of the January US jobs report on Friday, the greenback was in positive territory for the week against all G10 currencies despite the risk-on global equities environment. A mixed bag of employment numbers across the board triggered a drop in the greenback to close the week. The market reaction to the data misses were a direct result of expectations of a rising stimulus plan by Biden, fueling inflation expectations and a lower-for-longer approach by the Fed.
CPI numbers for January will be closely monitored this week to track any signs of price recovery. Any above consensus read should have a negative impact on US real rates and the dollar as the Fed’s flexible inflation targeting should keep the reaction muted. Market consensus suggests a 0.4% month-on-month increase in headline CPI. Further advancements on the fiscal front will remain centre stage and may keep investors on the optimistic side.
CAD: Grim employment numbers present a tough reality check
Spot
USD/CAD1.2772
Week ahead bias
Neutral
Weekly range
1.2730 – 1.2850
1 month target
1.2700
If US jobs numbers were grim, Canadian numbers were downright appalling. The economy lost 213k jobs in January as unemployment rose from 8.6% to 9.4%. This was largely a function of the new restrictions to combat COVID-19, some of which have been eased. That said, the employment print showed that most losses were recorded among part-time workers, but that was still a significant setback considering Canada’s recent good data-flow.
The implications for CAD beyond the very short-term may be limited. The brighter economic outlook on the back of vaccine availability in Canada suggests that there will be very little need for the BoC to step in with more stimulus. Looking at the week ahead, the data calendar in Canada is very quiet, so external factors will dominate. Among those, additional signs that the oil rally is gaining momentum should keep the upside on USD/CAD contained.
EUR: Teetering on both sides of the 1.20 EUR/USD handle
Spot
EUR/USD1.2035
Week ahead bias
Neutra
Weekly range
1.1960 – 1.2100
1 month target
1.2200
Before the underwhelming US jobs data came to the rescue, EUR/USD was trading below 1.20 for the first time in more than two months, and while it was the negative dollar sentiment that kept putting pressure on the pair of late, the relatively slow vaccination process in the eurozone may have started to take a toll on the EUR.
Improvements on EZ vaccinations could be the key for EUR/USD to move back above the 1.2000 mark, but that is unlikely to change rapidly. If anything, EUR/USD bulls will be hoping for two factors to offer some mild support: good December industrial production data and the confirmation that Mario Draghi secured a parliament majority in Italy. Some ECB speakers (including President Lagarde) look unlikely to deliver any surprising message and EUR/USD may remain predominantly driven by the greenback’s direction.
GBP: Sterling’s outlook remains positive
Spot
GBP/USD1.3723
Week ahead bias
Mildly Bullish
Weekly range
1.3600 – 1.3850
1 month target
1.3600
GBP was the best performing G10 currency last week, helped by a BoE meeting that has further reduced the odds of negative rates. They are unlikely to happen over the next 6 months due to operational risks, while the need to go negative after the 6-month period will be rather low as we expect a strong 2Q economic recovery. Coupled with the fast vaccination, GBP is set to benefit and GBP/USD to grind slowly higher.
On the domestic data front, the focus will be on the 4Q20 GDP (Fri) with the data print likely registering a marginally positive growth. Although this should be reversed in 1Q21 given the scale of the lockdown, all eyes are on the 2Q21 GDP and the expectation of the meaningful recovery given the fast vaccination process.
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